A recent focus on ‘long-term’ incentives for executives in the US, driven partly by shareholders exercising a ‘say on pay’, has backfired and led to unintended consequences, according to an article in the influential Harvard Business Review. In the five years since the advent of the Dodd-Frank regulation, which mandates a ‘say on pay’, corporate governance groups have pushed companies to replace annual share option schemes with multi-year performance plans. These plans require performance targets and in many cases, three years has become the standard performance window for measuring executive achievement.
So three years has become the standard ‘long-term’ period in most US companies, with the result that many executives ‘think twice’ about retaining earnings for projects beyond three years. That’s not ‘not even a presidential term’, the authors of the article – Blair Jones and Seymour Burchman from Semler Brossy Consulting Group – point out. They recommend that two new elements be added to existing short-term and three year plans in order to strengthen the focus on genuine long-term incentives: