15 December 2015 by Henry Ker
This month we asked the Governance and Compliance/Core community whether the short-term nature of targets undermines a company’s long-term success. There was a clear majority, with 58% agreeing with the statement, 28% disagreeing and 17% saying they do not know.
When asked how companies can safeguard their long-term success, the most common responses were through remuneration, strategy and stakeholders. In terms of remuneration, respondents proposed ‘aligning employee rewards with long-term performance’, and ‘tying executive remuneration into longer term targets [and] deferring pay’. Many advocated a ‘review of remuneration and incentive structures’ and suggested various new timescales: ‘remove short term [bonuses] and replace with long term – a minimum five years’ and ‘incentives … requiring at least a five to 10 year payback’.
Others argued it is more effective to stagger remuneration packages: ‘longer term … bonuses and incentive plans, with a staged entitlement/payout and stronger clawback provisions’. Another proposed to ‘set a mixture of short-term, mid-term and long-term targets which should be aligned. These can be incorporated into employees’ compensation outcomes and there should be implementation of malus if the remuneration committee or management deem it appropriate.’
Another popular response focused on the company’s strategy. The company should have ‘a clear long-term strategy, good succession plans, including LTIP’s, and effective management of both short and long-term risks’. Others suggested adaptability is key: ‘the strategy [must] take into account developments and innovations in their markets. The company needs to be agile to be able to respond to changing market and consumer behaviours’. Another respondent agreed, commenting: ‘through [the] operation of flexible, forward looking systems that future proof the present’. Although one argued that it is challenging strategy which is the most important element: ‘Robust discussion and challenge of strategic decisions, with a clearly defined plan to underpin the strategy, which is subject to strict monitoring of outcomes against forecast’.
Stakeholders are the final key to long-term success, according to our respondents. Companies ‘need supporting shareholders of the same view’ and ‘cannot [achieve long-term success] by themselves. It requires all stakeholders to agree to move to a longer-term model.’ Although this is not easy – companies must ‘communicate to shareholders that sustainable growth and long-term success may mean that some years bottom line growth and increased dividends are not always possible’. One respondent went further, explaining: ‘Companies can better safeguard their long-term success by taking into consideration all stakeholders ... not only investors. Shareholder value is created by a sustainable increase of the share price, but sustainable growth (and share price increase) cannot be achieved without considering the consequences for all stakeholders.’
If long-term success is to become the end goal for companies, then there are clear areas we can target to achieve this. Aligning overall strategy, remuneration and stakeholders is fundamental as it brings key elements of any company together. As one commented: ‘Ultimately, strong leadership at all levels of the organisation, an established and unified culture with strong values, goals and clear direction can help to foster longer-term security’.
If you are a company secretary or governance professional at a leading UK business, and you would like to take part in or comment on future surveys, email email@example.com
Conducted in association with The Core Partnership