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Strategy and Reward; why does Business plan for the future but reward for the past?

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Paul Williams; Former President of the Smith& Nephew subsidiary company in Japan and member of the Senior Civil Service Pay Review Body (SSRB), presented on "Strategy and Reward; why does Business …

Paul Williams; Former President of the Smith& Nephew subsidiary company in Japan and member of the Senior Civil Service Pay Review Body (SSRB), presented on "Strategy and Reward; why does Business plan for the future but reward for the past?" at Warwick Business School 25/02/2008

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  • Thank you Paul, interesting slides. I would enjoy hearing the full lecture - any chance of you putting it up on youtube?
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  • 1. WHY does business plan for the FUTURE but reward for the PAST? Paul Williams, Warwick Business School 25 February 2008 STRATEGY AND REWARD
  • 2. PAUL WILLIAMS’ CV – 5 RADICAL CHANGE SCENARIOS
    • WHO WHAT WHY
    • NCR Data Processing Technology
    • HEINZ Food Retail Superbrands
    • GLAXO Pharmaceuticals Generics
    • ROLLS ROYCE Engineering Market
    • SMITH & NEPHEW Medical Devices Technology
    • SMITH & NEPHEW Japan Culture
  • 3. TYPICAL “WOW” STATISTICS
    • In 1992 top US CEOs were paid 82 x blue collar pay
      • $2.7 million
    • In 2004 top US CEOs were paid 400 x blue collar pay
      • $14.7 million
    Professor Robert Daine - Stanford Graduate School of Business
  • 4. “ THE BIG ISSUE”
    • The relentless focus on HOW MUCH Chief Executive Officers are paid diverts public attention from the real problem:
    • HOW they are paid
    Michael Jensen & Kevin Murphy HBR
  • 5. CLASSIC PROFILE OF EXECUTIVE REWARD STRUCTURE
    • Element Objective Timeframes
    • BASE PAY Personal targets - current annual/quarter
    • Business targets - current annual/quarter
    • BONUS Profit targets - current annual
    • Revenue targets - current annual
    • ROCE targets - current annual
    • Margin targets - current annual
    • “ LONG TERM” Stock price -
    • Earnings per share - retrospective three
    • Total shareholder return - year “roll-up”
  • 6. CLASSIC QUANTUM OF CEO REWARD (UK)
    • FTSE 30 FTSE 31-100 Source
    • Median Base £979k £690k (1)
    • Bonus Target £636k £448k (2)
    • LTIP Expected Value 2075k 669k (1)
    • £3,690k £1,807k
    • The Changing Face of Senior Executive Remuneration (New Bridge Street 2007 Report)
    • Deloittes Executive Directors Remuneration 2007 Guide
  • 7. “ LONG TERM PERFORMANCE” - UK
    • Performance Share Plans are currently in operation in 86% of FTSE 100 Companies
    • TSR is the most popular PSP metric – 85% of FTSE 100 plans
    • Median actual award to FTSE directors is 130% of base salary
    Deloitte Executive Directors Remuneration Guide 2007
  • 8. “ LONG TERM PERFORMANCE” – US TOP 250 Category Performance Measures Percent of Companies Using Profit Earnings per share, net income 51% EBIT/EBITDA, operating income pretax profit Total Shareholder Return Stock price appreciation plus dividends 38% Efficiency Return on equity, return on assets, 34% return on operating income, return on capital, economic value added Other Cash flow, revenue growth, 28% discretionary, individual performance Frederic W. Cook & Co. Inc.
  • 9. WHAT ARE THE REASONS FOR THIS SHORT TERMISM ?
    • Financials are “concrete” and easy to communicate
    • CFO and analysts are most comfortable with these numbers
    • Recent corporate governance initiatives discourage subjectivity
    • Relatively short-term tenure of CEOs undermines long-term perspective
    • Stock options as a proxy for success encourage simplistic metrics
    • Current reward structures have served incumbents well
    Parc 2007 Report: Resilience – How Companies prepare for Success in the Future
  • 10. “ Top managers and the main players in the financial markets have tended to become part of a “system” of connected and symbiotic interests. This system, whilst informal, is coherent and well understood by insiders and can create huge opportunities for rewarding the players” Don Young, Founder YSC
  • 11. THE COMMON LIFE CYCLE – ALL THINGS Maturity Birth Maturity Demise Renewal
  • 12.
    • Growth
    • “ Feed the top line”
    • Organisation vitality
    • Investment mentality
    • High engagement & trust
    • Expanding
    • Acquisition
    CLASSIC GROWTH v MATURITY MODEL
    • Maturity
    • “ Protect the bottom line”
    • Operational efficiency
    • Cost mentality
    • Caution & control
    • Downsizing
    • Divestment
  • 13. THE NEED: A NEW FRAME OF REFERENCE FOR REWARD STRATEGY
    • “ SUSTAINABILITY”
      • the ability of the organisation to sustain its current business model
    • “ RESILIENCE”
      • the organisation’s ability to dynamically reinvent its business model as circumstances change
    Professor Sir Andrew Likierman - LBS
  • 14. THE COMMON LIFE CYCLE – ALL THINGS Maturity Birth Maturity Demise Renewal
  • 15. SUSTAINABILITY (S) AND RESILIENCE (R) DEMAND DIFFERENT METRICS WITHIN A TYPICAL STRATEGY MODEL
    • Time Horizon Drivers Metrics
    • SHORT • operating efficiency Profit (S)
    • • cost control Revenue (S)
    • • sales initiatives ROCE (S)
    • MID • customer focus ??? (S) & (R)
    • • product development
    • • marketing initiatives
    • LONG • technology bets ??? (R)
    • • research bets
    • • strategic initiatives
  • 16. A REALITY CHECK – 6 “CASE STUDIES”
    • ENRON : leaders consumed by wealth creation
    • NORTHERN ROCK : risk assessment sidelined by growth sirens
    • GSK : expansion at huge shareholder cost
    • ICI : an iconic brand: died January 2008: RIP
    • Cadbury-Schweppes : Nelson Peltz and shareholder activism
    • BRIC 2015 : will the same rules apply?
  • 17. BUT NO ROOM FOR COMPLACENCY: the number of Emerging Economy companies in the Fortune Global 500 2003 2006 2010 20 40 ? - - - Challenging “old” approaches to strategy & organisation Led by Brazil, Russia, India & China
  • 18. BUT WHO CARES?
    • INVESTORS?
    • EXECUTIVES?
    • ACADEMICS?
    • CORPORATE GOVERNANCE BODIES?
    • BUSINESS COMMUNITY?
    • GOVERNMENT?
  • 19. SOME POSITIVE IDEAS FOR DEBATE & FURTHER RESEARCH
    • THE DOMINANT SHORT TERM CITY MINDSET CAN BE CHANGED
    • NED ROLE SHOULD BE MORE INTRUSIVE
    • CORPORATE GOVERNANCE BODIES SHOULD ADD MORE VALUE
    • HR EXECUTIVES SHOULD STAND UP AND BE COUNTED
  • 20.
    • THE DOMINANT SHORT TERM CITY MINDSET CAN BE CHANGED
    In 2004 the Enhanced Analytics Initiative (EAI) was launched by institutional investors to examine the obstacles to investors taking a longer term and more rounded assessment of corporate performance – in particular to take a hard look at the current focus of much sell-side research. In City jargon the intention is to give more emphasis to “extra-financials and intangibles” which in the words of Peter Moon, CIO of one of the founding members (USS Ltd) “can account for a significant proportion of the value of a company, especially over the long term”. Current members of EAI include amongst others; ABP Pension Fund BNP Paribas Asset Management BT Pension Scheme Hermes Pensions Management Investec asset Management Deutscher Investment Trust/Dresdnerbank Investment Management Universities Superannuation Scheme EAI member institutions collectively own or manage more than US$ 2.6 trillion in assets
  • 21.
    • NED ROLE SHOULD BE MORE INTRUSIVE
      • Board role can learn from Private Equity model
        • “ Buy, build, and sell” strategy
        • Flexible ownership mindset
        • Stronger Chairman role
      • Remuneration Committee should be pro-active/demanding on strategy metrics
    • CORPORATE GOVERNANCE BODIES SHOULD ADD MORE VALUE
      • Should worry less about “fat cats”
      • Should worry more about “relevant growth” and strategy delivery
      • Should establish and promote “best practice”
  • 22.
    • HR EXECUTIVES SHOULD STAND UP AND BE COUNTED
      • Exploit their exposure to RemCo and NEDS
      • Utilise their technical expertise to design better schemes, e.g.
        • 5 year vesting with better use of ROIC
        • Bigger retained shareholding for executives
        • Strategic targets for CEO and CFO
        • Significant metrics for talent management
        • Negative penalties for non-achievement – escrow accounts and bonus deferral
        • Sharpening of objectives clarity
        • Higher profile for risk assessment
        • Influencing the CEO/CFO to sell a broader picture to analysts
  • 23. TWO QUOTES FROM MICHAEL PORTER
    • “ In essence the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly as if it occurred only amongst today’s direct competitors.”
    • “ The conversation between investors and executives (should) focus on the structural not the transient . Imagine the improvement in company performance – and in the economy as a whole – if all the energy expended in “pleasing the Street” were redirected towards the factors that create true economic value ”
    HBR January 2008
  • 24. AND FINALLY …………
    • NOT EVERYTHING THAT COUNTS
    • can be counted
    • NOT EVERYTHING THAT CAN BE COUNTED
    • counts”
    Albert Einstein