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The most effective long-term remuneration structures are tailored to a company’s circumstances, strategy, and management. Careful tailoring of long-term remuneration packages involves directors—and their shareholders—taking multiple steps over time.
Corporate boards can encourage long-term behavior by executives and long-term performance by companies by making changes to executive remuneration, and investors can support this approach through their engagement. These tools empower companies to tailor long-term remuneration by replacing some elements now, reflecting on their long-term needs, and finally by using key decisions to redesign pay packages:
Remuneration powerfully influences executives’ long-term behavior and companies’ long-term performance. While there remains no substitute for long-term corporate boards and long-term investor-corporate dialogue, we expect that using these tools will help executive remuneration both reward long-term behaviors and drive long-term performance.
FCLTGlobal has researched long-term behaviors related to other aspects of corporate resource allocation—including research and development and buybacks—and their impact on long-term performance. Our research on remuneration is in that same spirit: long-term incentives for executives can help the firm perform well over time. Tailored remuneration changes can make a meaningful difference in driving long-term behaviors in CEOs.
8 March 2021
Short-term incentives motivate short-term behavior. Corporate boards can drive long-term performance by making changes to remuneration that encourage long-term behavior by executives while avoiding common pitfalls. Similarly, investors can support long-term executive remuneration plans through their votes and engagement. Financial incentives motivate behavior—indeed, financial incentives may work too well. Executive pay is focused on a short time horizon—with recent data pegging average duration of executive compensation plans for CEOs of MSCI All Country World Index (ACWI) constituents at 1.7 years. This short-term focus can have far-reaching consequences, yet setting out to make remuneration longer-term is no simple task.
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Incentive Alignment | Report
8 March 2021 - The Risk of Rewards presents practical approaches that companies and their investors can use to frame their decisions about corporate executive remuneration to support long-term value creation
Incentive Alignment | Article
28 July 2020 - FCLTGlobal will research new ways in which short-term, status-quo compensation practices can be restructured to enhance long-term value creation.
Incentive Alignment | Article
27 August 2020 - Some long-term investors are ready for companies to depart from the pay-for-performance status quo, but the jury is still out on the method that many of them are considering as a replacement.