Long-term incentive (LTI) schemes for Australian executives are driven by “caution and conformity” and the one-size-fits all approach needs reform, according to a research paper from funds manager BlackRock.
Pru Bennett, BlackRock’s Asia-Pacific head of corporate governance and responsible investment, has studied the LTI schemes used by 148 companies listed on the ASX and found that 95 per cent of them use a standardised rather than a tailored approach, largely designed by proxy advisers.
“They are eschewing simplicity or creativity and instead, choosing a tick-the-box approach,” Bennett says.
“We would argue that tailoring incentives to fit individual company strategy, goals and operating dynamics is preferable.”
The study notes four changes in LTI remuneration between 2005 and 2010 among the 148 companies surveyed: improved disclosure, a shift from market-priced options to zero-exercise price options that still hold value if share prices fall, an increase in relative total shareholder return and an expansion of LTI performance metrics.
“There is a growing trend for LTIs to become increasingly complex and to include measures that are not necessarily the most appropriate,” says Bennett.
“This is occurring despite LTIs becoming more important.”
Bennett urges Australian corporates to break out of the “straightjacket” and combine both long and short-term incentives.
She points to the “intriguing” example of India, where the total remuneration package paid to public company executives cannot exceed 11 per cent of any annual net profits.
“We think that simplicity should be the guiding principle,” says Bennett.
“Internal measures that are more controllable, such as profit, as opposed to external measures, such as external shareholder return, are one principle.
“Clear and immediate rewards for success are likely to be more motivating than promises which extend way into the future.”