Reward Focus – A Bird In The Hand Is A Bit Like A STI…

And the two in the bush is a bit like a LTI. Even if we assume that the LTIs and STIs are equal in difficulty (but they are not – see HERE), a STI and a LTI that are otherwise equal in value still would not command equal attention. Psychologists would say that proximity or immediacy of reward adds to its “value”. So, all else being equal, a LTI needs to provide more value to get just the same level of attention from the CEO. Secondly, the same psychologists would say that the longer term reward may be subject to more uncertainty due to unknowable factors (merger, disability, economic recession, climate change, an invasion of Iran or an enormous sink hole that swallows Melbourne) that further discounts its value.

So, if the board wants a better balance to the emphasis on both short term and long term results, it may need to add a few more dollars to the LTI just to have the same pull as the STI.

© Guerdon Associates 2021
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