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Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
Strategy and Reward; why does Business plan for the future but reward for the past?
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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 <ul><li>WHO WHAT WHY </li></ul><ul><li>NCR Data Processing Technology </li></ul><ul><li>HEINZ Food Retail Superbrands </li></ul><ul><li>GLAXO Pharmaceuticals Generics </li></ul><ul><li>ROLLS ROYCE Engineering Market </li></ul><ul><li>SMITH & NEPHEW Medical Devices Technology </li></ul><ul><li>SMITH & NEPHEW Japan Culture </li></ul>
  • 3. TYPICAL “WOW” STATISTICS <ul><li>In 1992 top US CEOs were paid 82 x blue collar pay </li></ul><ul><ul><li>$2.7 million </li></ul></ul><ul><li>In 2004 top US CEOs were paid 400 x blue collar pay </li></ul><ul><ul><li>$14.7 million </li></ul></ul>Professor Robert Daine - Stanford Graduate School of Business
  • 4. “ THE BIG ISSUE” <ul><li>The relentless focus on HOW MUCH Chief Executive Officers are paid diverts public attention from the real problem: </li></ul><ul><li>HOW they are paid </li></ul>Michael Jensen & Kevin Murphy HBR
  • 5. CLASSIC PROFILE OF EXECUTIVE REWARD STRUCTURE <ul><li>Element Objective Timeframes </li></ul><ul><li>BASE PAY Personal targets - current annual/quarter </li></ul><ul><li>Business targets - current annual/quarter </li></ul><ul><li>BONUS Profit targets - current annual </li></ul><ul><li>Revenue targets - current annual </li></ul><ul><li>ROCE targets - current annual </li></ul><ul><li>Margin targets - current annual </li></ul><ul><li>“ LONG TERM” Stock price - </li></ul><ul><li>Earnings per share - retrospective three </li></ul><ul><li>Total shareholder return - year “roll-up” </li></ul>
  • 6. CLASSIC QUANTUM OF CEO REWARD (UK) <ul><li>FTSE 30 FTSE 31-100 Source </li></ul><ul><li>Median Base £979k £690k (1) </li></ul><ul><li>Bonus Target £636k £448k (2) </li></ul><ul><li>LTIP Expected Value 2075k 669k (1) </li></ul><ul><li>£3,690k £1,807k </li></ul><ul><li>The Changing Face of Senior Executive Remuneration (New Bridge Street 2007 Report) </li></ul><ul><li>Deloittes Executive Directors Remuneration 2007 Guide </li></ul>
  • 7. “ LONG TERM PERFORMANCE” - UK <ul><li>Performance Share Plans are currently in operation in 86% of FTSE 100 Companies </li></ul><ul><li>TSR is the most popular PSP metric – 85% of FTSE 100 plans </li></ul><ul><li>Median actual award to FTSE directors is 130% of base salary </li></ul>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 ? <ul><li>Financials are “concrete” and easy to communicate </li></ul><ul><li>CFO and analysts are most comfortable with these numbers </li></ul><ul><li>Recent corporate governance initiatives discourage subjectivity </li></ul><ul><li>Relatively short-term tenure of CEOs undermines long-term perspective </li></ul><ul><li>Stock options as a proxy for success encourage simplistic metrics </li></ul><ul><li>Current reward structures have served incumbents well </li></ul>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. <ul><li>Growth </li></ul><ul><li>“ Feed the top line” </li></ul><ul><li>Organisation vitality </li></ul><ul><li>Investment mentality </li></ul><ul><li>High engagement & trust </li></ul><ul><li>Expanding </li></ul><ul><li>Acquisition </li></ul>CLASSIC GROWTH v MATURITY MODEL <ul><li>Maturity </li></ul><ul><li>“ Protect the bottom line” </li></ul><ul><li>Operational efficiency </li></ul><ul><li>Cost mentality </li></ul><ul><li>Caution & control </li></ul><ul><li>Downsizing </li></ul><ul><li>Divestment </li></ul>
  • 13. THE NEED: A NEW FRAME OF REFERENCE FOR REWARD STRATEGY <ul><li>“ SUSTAINABILITY” </li></ul><ul><ul><li>the ability of the organisation to sustain its current business model </li></ul></ul><ul><li>“ RESILIENCE” </li></ul><ul><ul><li>the organisation’s ability to dynamically reinvent its business model as circumstances change </li></ul></ul>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 <ul><li>Time Horizon Drivers Metrics </li></ul><ul><li>SHORT • operating efficiency Profit (S) </li></ul><ul><li>• cost control Revenue (S) </li></ul><ul><li>• sales initiatives ROCE (S) </li></ul><ul><li>MID • customer focus ??? (S) & (R) </li></ul><ul><li>• product development </li></ul><ul><li>• marketing initiatives </li></ul><ul><li>LONG • technology bets ??? (R) </li></ul><ul><li>• research bets </li></ul><ul><li>• strategic initiatives </li></ul>
  • 16. A REALITY CHECK – 6 “CASE STUDIES” <ul><li>ENRON : leaders consumed by wealth creation </li></ul><ul><li>NORTHERN ROCK : risk assessment sidelined by growth sirens </li></ul><ul><li>GSK : expansion at huge shareholder cost </li></ul><ul><li>ICI : an iconic brand: died January 2008: RIP </li></ul><ul><li>Cadbury-Schweppes : Nelson Peltz and shareholder activism </li></ul><ul><li>BRIC 2015 : will the same rules apply? </li></ul>
  • 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? <ul><li>INVESTORS? </li></ul><ul><li>EXECUTIVES? </li></ul><ul><li>ACADEMICS? </li></ul><ul><li>CORPORATE GOVERNANCE BODIES? </li></ul><ul><li>BUSINESS COMMUNITY? </li></ul><ul><li>GOVERNMENT? </li></ul>
  • 19. SOME POSITIVE IDEAS FOR DEBATE & FURTHER RESEARCH <ul><li>THE DOMINANT SHORT TERM CITY MINDSET CAN BE CHANGED </li></ul><ul><li>NED ROLE SHOULD BE MORE INTRUSIVE </li></ul><ul><li>CORPORATE GOVERNANCE BODIES SHOULD ADD MORE VALUE </li></ul><ul><li>HR EXECUTIVES SHOULD STAND UP AND BE COUNTED </li></ul>
  • 20. <ul><li>THE DOMINANT SHORT TERM CITY MINDSET CAN BE CHANGED </li></ul>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. <ul><li>NED ROLE SHOULD BE MORE INTRUSIVE </li></ul><ul><ul><li>Board role can learn from Private Equity model </li></ul></ul><ul><ul><ul><li>“ Buy, build, and sell” strategy </li></ul></ul></ul><ul><ul><ul><li>Flexible ownership mindset </li></ul></ul></ul><ul><ul><ul><li>Stronger Chairman role </li></ul></ul></ul><ul><ul><li>Remuneration Committee should be pro-active/demanding on strategy metrics </li></ul></ul><ul><li>CORPORATE GOVERNANCE BODIES SHOULD ADD MORE VALUE </li></ul><ul><ul><li>Should worry less about “fat cats” </li></ul></ul><ul><ul><li>Should worry more about “relevant growth” and strategy delivery </li></ul></ul><ul><ul><li>Should establish and promote “best practice” </li></ul></ul>
  • 22. <ul><li>HR EXECUTIVES SHOULD STAND UP AND BE COUNTED </li></ul><ul><ul><li>Exploit their exposure to RemCo and NEDS </li></ul></ul><ul><ul><li>Utilise their technical expertise to design better schemes, e.g. </li></ul></ul><ul><ul><ul><li>5 year vesting with better use of ROIC </li></ul></ul></ul><ul><ul><ul><li>Bigger retained shareholding for executives </li></ul></ul></ul><ul><ul><ul><li>Strategic targets for CEO and CFO </li></ul></ul></ul><ul><ul><ul><li>Significant metrics for talent management </li></ul></ul></ul><ul><ul><ul><li>Negative penalties for non-achievement – escrow accounts and bonus deferral </li></ul></ul></ul><ul><ul><ul><li>Sharpening of objectives clarity </li></ul></ul></ul><ul><ul><ul><li>Higher profile for risk assessment </li></ul></ul></ul><ul><ul><ul><li>Influencing the CEO/CFO to sell a broader picture to analysts </li></ul></ul></ul>
  • 23. TWO QUOTES FROM MICHAEL PORTER <ul><li>“ 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.” </li></ul><ul><li>“ 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 ” </li></ul>HBR January 2008
  • 24. AND FINALLY ………… <ul><li>NOT EVERYTHING THAT COUNTS </li></ul><ul><li>can be counted </li></ul><ul><li>NOT EVERYTHING THAT CAN BE COUNTED </li></ul><ul><li>counts” </li></ul>Albert Einstein

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