New Study Shows That Market Responds to More Focus on Short-Term Goals
New research shows that a decrease in short-term incentive is poorly received by shareholders, contrary to the stated mission of large institutional shareholders. Moreover, the study shows that companies with a poor past performance and profitability react stronger upon the announcement of changes in executive compensation.
Based on a study by James F. Reda & Associates, LLC, an independent executive compensation and corporate governance consulting firm in New York City, “Executive Compensation Trends for 2009: Balancing Risk, Performance and Pay,” Henriette Struck and Sara Fiehn, graduate students of the Lund University of Sweden Master of Finance Program, released their master thesis, “Effects of Changes in Executive Compensation in Light of the Financial Crisis.” Ms. Struck and Ms. Fiehn learned of this study when it was referenced on the World Economic Forum website.
As Ms. Struck explains, “The study shows that since the financial crises, shareholders emphasize a compensation package design that motivates managers to take short-term value enhancing actions in the company rather than longer-term activities. This controversial approach might be triggered by the desire to increase share prices as quickly as possible back to pre-crisis levels.”
These conclusions based on the underlying report are not surprising as the August 2009 study clearly showed that in response to the economic meltdown of late 2008/early 2009, companies focused their incentive programs on achieving short-term results.
James Reda, Founder & Managing Director of James F. Reda & Associates, is not surprised by the conclusions of the study. Mr. Reda reminds us that, “While the pension funds and business think tanks have been urging companies to think long-term, most investors are concerned about immediate and short-term results and goals. It only makes sense that if you cannot meet your short-term goals, how can you expect shareholders believe that you will do better meeting the longer-term goals.”
Mr. Reda goes on to say, “The other major finding is that the market responds more to companies with a history of poor performance also makes sense as shareholders want answers from poorly performing companies while giving good performing companies more time to show results.”
Online News Heard Now,
Tommy Mac
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