When returns on
capital are
ordinary, an earn-more-by-putting-up-more
record is no great managerial achievement. You can get the same
result personally while
operating from your rocking chair. Just quadruple the capital you commit to a
savings account and you will quadruple your
earnings. You would hardly expect hosannas for that particular accomplishment. Yet,
retirement announcements regularly sing the praises of CEOs who have, say, quadrupled earnings of their
widget company during their reign -- with no one examining whether this
gain was attributable simply to many years of
retained earnings and the workings of
compound interest. The
power of this
simple math is often ignored by companies to the
detriment of their shareholders. Many
corporate compensation plans
reward managers handsomely for earnings increases produced solely, or in large part, by retained earnings -- i.
e. earnings withheld from owners.
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