Effort, Luck and Value

Human beings will direct effort to achieving outcomes that they can influence and that deliver the most valuable reward. Offering a LTI that is 3 times the value of a STI will not overcome short termist tendencies if the LTI measure is one over which executives have little influence. As we have said several times in past newsletters, relative TSR is an excellent conceptual basis for performance comparison. But it falls down repeatedly in execution. Unless TSR is measured against real competitors for revenues, customers, labour, capital, and suppliers it is irrelevant. In a shallow market like Australia’s there could be few real competitors. But we have not encountered too many relative TSR performance requirements where the competitors are honed down to the four of five that are the real competitors. And selecting a larger but disparate group, such as the ASX 100, just does not cut it. A disparate group, like the ASX 100, will, by definition, comprise companies at different points in their different cycles. Therefore it would be highly probable that “peer” companies in a large index will deliver both higher and lower TSRs as a result. So a relative TSR outcome is more due to luck than skill. Why bother? Some companies have recognised this, and selected LTI measures over which the executives have more influence. And some governance and shareholder groups have also recognised this, such as the Australian Shareholders’ Association. But for the majority of ASX 300 companies, the behavioural impact of the LTI requirement is the opposite of what is intended, with the CEO focus on the short term!

© Guerdon Associates 2021
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