Thanks in large part to the incentives that companies create for their most senior people, growth is often among the corporation’s most important goals. But growth and value creation are not the same. Growth adds value only when the incremental investment required generates a return greater than the opportunity cost of capital (OCC). All other growth actually destroys value—and enough bad investments can eventually kill a company.
Although strategy theorists have contributed to the corporate obsession with growth through their emphasis on learning curves and market share, the authors view the primary culprit as the “competitive pay” framework that began to be adopted by U.S. companies after World War II. Rather than paying senior managers for their contributions to the value of the firm, they have increasingly been paid by what their peers at other firms get—and peer firms are nearly always defined by sales. Because managers at firms with higher sales get higher pay, the clear incentive is to grow the firm quickly into a higher peer group. The result: value-destroying growth.
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