Optimising Shareholder Returns Can Never Be An Outcome of Boilerplate Pay

We never cease to be amazed at the lack of variety in executive pay. Fixed pay, and STI based on annual results, and a LTI based on relative TSR. That’s it. The same suit of clothes for the short fat bloke as for the tall skinny bloke. Is there anyone paying attention to what the business needs? A simple graphic of monthly earnings volatility over 5 years will illustrate business cycles. Adjust pay plans to the earning cycles of the business. If a fashion brand has a 6 monthly winter/summer cycle then consider a STI that measures 6 monthly results, not annual results. Likewise, if exploration leases take 7 years to survey, plan, construct, mine and turn into alumina just in time for the next planned commodities up cycle, then design an option plan accordingly. If a biotechnology company has all its eggs in a risky wonder drug research effort, provide just enough salary to buy the groceries, and a single mega grant of 4 year options to sweat out a billion dollars’ return. If the business is about acquiring established brands to incorporate into existing manufacturing and distribution infrastructure, put in place the 18 month medium term incentive required to focus on investors’ expectations of earnings accretion. Where o’ where, corporate Australia, is the differentiation required for competitive advantage?

© Guerdon Associates 2024
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