Boston, MA, 22 March 2020 – FCLTGlobal, a not-for-profit organization that develops research and practical tools to drive long-term value creation, has published new research on today’s executive pay practices. The report, The Risk of Rewards, presents new practical approaches that companies, and their investors, can use to frame their decisions about corporate executive remuneration to support long-term value creation.

Since financial incentives directly drive corporate behavior, it is critical that companies—with the support of their long-term shareholders—design executive remuneration plans that motivate long-term behavior. However, the data about whether this is happening are mixed.

• The average duration of executive compensation plans for today’s CEOs is shorter than 2 years.
• Recent surveys of more than 1,000 global executives find that only half agreed that their companies’ long-term incentive plans were effective.
• Behavioral studies find that performance-linked pay motivates people effectively only for routine tasks, which do not match the duties of a CEO.

Such a narrow, short-term focus can have far-reaching consequences, according to the study. FCLTGlobal believes that corporate boards can drive long-term performance by making changes to remuneration that encourage long-term behavior by executives. Similarly, investors can support long-term executive remuneration plans through their proxy votes and ongoing engagement. The report recommends a three-pronged approach to adjusting executive remuneration to match long-term performance:

1. Replace ongoing remuneration provisions that are counterproductive to long-term value creation as soon as possible.
2. Evaluate the relationship between the company’s unique circumstance and remuneration design.
3. Redesign remuneration by making key decisions around: (1) how pay is linked to performance; (2) the instruments of pay; (3) the time horizon of the plan; and (4) the holding levels that executives are required to maintain in company securities.

“Our research has always shown that structuring incentives properly can encourage companies and investors to pursue long-term performance over short-term gains. Nowhere is that truer than in executive pay plans – tailored remuneration approaches can drive CEOs to manage in a more long-term fashion, and align their performance more closely to company strategy,” said Sarah Keohane Williamson, FCLTGlobal’s chief executive officer.

To complement these findings, the report offers a suite of practical tools and guides to aid companies and shareholders alike. To learn more, read the report at www.fcltglobal.org/executive-pay.

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