Paying for bad calls
Indian cricket authorities have torn up the Indian Premier League (IPL) contracts of Steve Smith and David Warner. The two Australians have been suspended from international cricket because of their role in the ball tampering scandal in South Africa. They have lost out on $2.4 million because of not playing in the T20 league this summer. This is not an amount to be sniffed at.
The limited liability company is a far cry from a cricket team. It is the shareholder who bears the burden of management mistakes through either loss of market capitalization or fines imposed by regulators—as it should be. However, company boards that design the compensation incentives of top managers would do well to include elements that make senior managers lose out financially in case of decisions that wilfully hurt shareholders. For example, traders in Wall Street banks took excess risks to earn their annual bonuses while shareholders or taxpayers had to foot the bill when these bets backfired.
There is, thus, a broader lesson from the ball tampering scandal.