Lawrence does not comment on the policies of specific companies. However, he points out that measures of earnings (profits) need to take into account how the profits are funded. “You will double your profit if you buy a company, so you are after a measure that includes how to fund profit growth,” he says.
Morris says the widespread use of relative TSR measure is flawed. For example, in companies where the share price is relatively stable – he uses utilities companies are an example – the measure fails. A stable stock price outperforms a falling market and underperforms a rising one.
Investment consultant Jack Gray says leaders have little influence over their companies’ share prices, according to studies. “Eighty percent of price movement is random and leaders can only influence 20%,” says Gray, who is also a professor at the Paul Woolley Centre for the Study of Capital Market Dysfunctionality at the University of Technology, Sydney.
Gray dismisses the whole idea of bonuses, saying they distort executive behaviour, according to studies by the National Bureau of Economic Return, in Boston, America. “If you pay bonuses to people on a factory line they work harder and longer, but if you pay bonuses to top executives, it encourages them to game the system.”
The goal of companies is not to make profits, Gray says. “It is to generate something people will pay for and then you get profits.”
Lawrence expects to see more innovation from boards revealed in the upcoming reporting season. He thinks deferring payments and even clawing back bonuses if the company’s fortunes change are among the ideas that boards will be considering.
Morris will not be drawn on the matter of best practice in remuneration; to do so would undermine his point that one size does not fit all.
“There is no such thing as best practice,” he says. “I can’t help but go back to the characteristics of transparency, fairness and alignment. What are you doing, and are you communicating it properly? Is it aligned to suit your business and the expectations of external shareholders, while motivating internal stakeholders.”
This article first appeared on LeadingCompany.
