Michael C. Jensen

Michael C. Jensen is cited as a Harvard Business School professor whose analysis of corporate incentives exposes a damaging contradiction: companies need candid information to plan for the future, yet performance targets tied to bonuses can reward managers for distorting what they know and what they report. His example turns the book’s broader contrast between organizations and markets into a practical question of incentives: what behavior does a system actually pay for?

Identity and Argument

Jensen enters the discussion as an authority on the way corporate budgets and performance targets are set. His concern is not simply that managers may miss goals, but that the design of the goals shapes what they have reason to say and do. When compensation depends on beating a target, the target itself becomes an object to manage, rather than a neutral measure of performance.

Targets and Strategic Reporting

Jensen identifies two predictable responses to target-based bonuses. Before a target is fixed, managers have reason to make it easy to reach by understating estimates for the coming year and presenting their prospects pessimistically. After the target is set, they have reason to do whatever it takes to meet it, including accounting maneuvers that improve current results at the expense of the future. The incentive therefore operates at two stages: first to lower expectations, then to satisfy them by methods that may obscure the company’s longer-term condition.

The book connects this pattern to the pressure CEOs faced in the late 1990s to meet Wall Street’s expectations. Jensen’s sharply phrased conclusion is that companies are “paying people to lie.” The phrase captures an institutional effect, not merely a personal failing: when the reward is attached to surpassing a benchmark, selective reporting and manipulation can become rational ways to protect compensation, even as they undermine the information on which planning depends.

Organizational Consequences

Jensen’s analysis supports the book’s wider criticism of top-down corporate incentives. Companies need accurate knowledge to make plans for the future, but a system that rewards managers for beating expectations can make accurate disclosure costly. The result is a gap between the information an organization needs and the information its reward structure encourages people to provide.

The contrast with markets clarifies the alternative. A local deli owner does not earn more simply because sales exceed the owner’s private forecast; the owner earns according to what the business actually does. In the book’s comparison, markets also reward the discovery and use of valuable private information, allowing it to become public through action. Jensen’s example thus helps frame a larger organizational challenge: companies must find ways to give employees reasons to uncover and act on information, rather than incentives to hide it or shape it around a target.