REWARD VALUE AIMS FOR REMUNERATION POLICIES THAT CONTRIBUTE TO LONG-TERM VALUE CREATION
Current remuneration methods remain too focused on short-term financial results
The Hague, 15 July 2020 – Reward Value today presents its response to the European Commission’s consultation on the renewed sustainable finance strategy. Reward Value is a not-for-profit research initiative that aims to establish a new foundation for sustainable stakeholder-focused remuneration policies that are aligned with the idea that first and foremost, performance that contributes demonstrably to long-term sustainable value creation for all stakeholders should be rewarded.
At the moment, there is a worldwide and often emotional debate ongoing about remuneration policies and variable executive remuneration in particular. Reward Value seeks to increase the focus on rational arguments and – together with SEO Amsterdam Economics (SEO) – carries out scientific research into how remuneration policies may contribute to long-term value creation for all stakeholders. Research by Reward Value and SEO has highlighted a number or issues:
- Even though long-term value creation for all stakeholders is indeed increasingly considered a priority, it still is not reflected to a sufficient degree in remuneration policies.
- Executive remuneration still puts too much emphasis on short-term financial performance, even though such performance is no guarantee for a healthy long-term future for the company and all its stakeholders. This is partly attributable to the fact that the long-term horizon does not coincide with the end of a director’s term of appointment. In other words, there is a mismatch between the time horizon of the director and that of stakeholders.
- We have found that the current practice of using share-based rewards – usually awarded on an annual basis – as an executive incentive, can obstruct long-term value creation.
Key points of Reward Value’s response to the Renewed sustainable finance consultation
- Reward Value today submitted its contribution to the European Commission’s consultation. In its response, Reward Value emphasizes that greater standardization of the form and content of integrated reporting – especially with regard to a company’s non-financial performance – not only improves transparency and comparability, but is also essential to arrive at a remuneration policy that encourages long-term value creation.
- Also because scientific research has shown that effective ESG policies contribute to long-term value creation, Reward Value believes that non-financial performance should be considered as part of the assessment and remuneration of company directors. Currently, the vast majority of companies base their assessment of a director’s performance mainly, and sometimes even exclusively, on the traditional financial performance standards. This is not enough to motivate directors to make choices in favour of non-financial results and implies the lack of proper alignment between purpose and reward.
- Despite the use of long-term share-based rewards, the existing remuneration structure still predominantly impacts short-term behaviour. The renewed sustainable finance strategy also argues that this short-term focus should make way for a more long-term focus. Incorporating ESG policies and a structural extension of the remuneration horizon could help to achieve this.
It is important, however, that comparable metrics are used to measure non-financial performance and that companies, investors and policymakers speak the same language. We are currently seeing several excellent initiatives that work to achieve this consistency. To ensure that the final step is taken and the right choices are made on the basis of these initiatives, organisations such as the European Commission will probably have to implement regulations. The current consultation should play a significant part in this.
Reward Value’s founder Frederic Barge: “Remuneration, long-term value creation, shareholder interests, stakeholder interests. These are terms that we have become all too familiar with. Terms that suggest an intrinsically rational element. But unfortunately, most of the debate about executive remuneration is dominated by emotion, instead of by factual and rational considerations. That is why I want to create a factual, research-driven, framework that enables us to develop remuneration policies that really encourage long-term value creation – for all stakeholders. And by that I also mean better long-term financial results. Financial results as the desired outcome of long-term social value creation and not as an objective per se. So we want to move away from short-term financial gain and towards positive long-term contributions to society at large. The European Commission’s consultation on the renewed sustainable finance strategy is a step in the right direction.”
The future
Reward Value aims to establish a framework based on scientific insights that will provide for better alignment between executive remuneration and today’s trends. A framework based on objective measures that does justice to the interests of all stakeholders and that incentivizes directors to really focus on long-term value creation. Furthermore, Reward Value wants to develop a methodology in which long-term value creation takes precedence over short-term performance. An important condition, though, is the development of a well-integrated yardstick that covers both financial and non-financial performance. This yardstick should furthermore adjust for market fluctuations that directors have no influence over. Finally, Reward Value wants to establish the rules of play that are necessary to ensure that remuneration policies are applied fairly for all stakeholders (governance). Reward Value is currently discussing this issue with academics, specialists on the ground and advocacy groups, based on a Green Paper published by Reward Value. This Green Paper is available upon request via publications@rewardvalue.org or www.rewardvalue.org.
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