09 January 2007
Simplifying Executive Pay
Comment on "It pays to simplify executive compensation" - 4th January 2007 by John Plender (Financial Times) Click here to see the original article (subscription required)
John Plender appears to be unduly sceptical about TSR as a performance measure. It is true that many TSR based remuneration schemes are badly designed and do pay out windfalls that are not attributable to executive performance. However this is not the fault of the performance measure, this is the fault of the scheme design. A well designed scheme will only pay out if performance has been good compared to the performance of a set of comparable companies.Similarly a well designed remuneration scheme will only pay out for genuine long term increases in TSR. Short term changes in TSR are meaningless because of share price volatility, but a well designed scheme can eliminate the effect of volatility.Growth in the TSR index over the long term is what creating shareholder value is all about. All other performance measures (including Economic Value Added) matter only because they are predictors of long term growth in shareholder value. Long term growth in TSR is the one and only performance measure on which directors should receive variable pay.John Plender is quite right to point out that it pays to simplify executive compensation. A single incentive scheme based on long term TSR growth would provide far, far better incentives than the plethora of incentive schemes with which most executives are currently rewarded.
As appeared on ft.com subscription website (9th January 2007):
http://www.ft.com/cms/6c2bf1ce-91b7-11da-bab9-0000779e2340.html?q=y&a=tpc&s=646099322&f=6361039231&m=8361039231
John Plender appears to be unduly sceptical about TSR as a performance measure. It is true that many TSR based remuneration schemes are badly designed and do pay out windfalls that are not attributable to executive performance. However this is not the fault of the performance measure, this is the fault of the scheme design. A well designed scheme will only pay out if performance has been good compared to the performance of a set of comparable companies.Similarly a well designed remuneration scheme will only pay out for genuine long term increases in TSR. Short term changes in TSR are meaningless because of share price volatility, but a well designed scheme can eliminate the effect of volatility.Growth in the TSR index over the long term is what creating shareholder value is all about. All other performance measures (including Economic Value Added) matter only because they are predictors of long term growth in shareholder value. Long term growth in TSR is the one and only performance measure on which directors should receive variable pay.John Plender is quite right to point out that it pays to simplify executive compensation. A single incentive scheme based on long term TSR growth would provide far, far better incentives than the plethora of incentive schemes with which most executives are currently rewarded.
As appeared on ft.com subscription website (9th January 2007):
http://www.ft.com/cms/6c2bf1ce-91b7-11da-bab9-0000779e2340.html?q=y&a=tpc&s=646099322&f=6361039231&m=8361039231
Labels: Complexity, Plender, TSR
