Shareholder value?

Question

Why is it essential that management compensation, including bonuses, be linked to financial goals and strategies that achieve shareholder value?

Answer 1

To align management goals with shareholder goals, which is to maximize shareholder value to maximize shareholder returns.

Answer 2

Excellent question.  The key word you used is "essential" which does not mean "required".  It is not required.  It is "essential" because the average shareholder takes no part in operating or managing the business and can only receive a benefit (i.e., increased share value) when the financial and/or strategic goals are achieved in most companies.

Answer 3

Shareholders are the owners.  It is the duty of the manager to seek benefits in favor of the owners, because that is what he was hired to do.  He/she must propose operations linked to profits.  To keep tha manager's interests tied to the interests of the owners, he/she is frequently paid on the basis of company performance and the plans used to get there.

Value here can be:  profits, dividends, increase in the value of the stocks, etc.  As long as the owners get benefits (superior than what the bank or bonds would pay), the manager will probably be fine.