The times for sandbagging are over
For once, ISS has done something good for the long-term success of companies, as it will now sever the ties between budget and bonus. The times of sandbagging during budgeting in order to (positively) influence the annual performance bonus are over. This also allows a streamlining of the budgeting process.
Managers will no longer be punished for events beyond their control
More often than not, bonus plans do not pay out the expected value for the entrepreneurial effort, for internal and, even more demotivating, external reasons, which cannot be influenced by management. The results are often unhappy and distracted management. This will never be the case when the firm’s performance is measured based on relative performance against a pre-defined peer group. There is no internal game-playing possible during budgeting. And external events, like a falling stock-market, are not taken into account when measuring company performance.
The result: Increased motivation and focus on growth
The result of relative performance measurement is clearly visible in sports: Excellent results paired with the highest motivation - and satisfaction of the competitors, be it in tennis or ski racing. With the new approach to measuring performance chosen by ISS, the same will be visible in firms where everybody will strive for profitable growth to outperform the market.
For more than 10 years, we at Obermatt have supported a strong focus by the Board and management on profitable growth and shareholder return, both measured against a peer group, as we define it with our clients. Our approach is based on academic research and we can prove that such companies perform better in the long run than those using performance metrics which are solely based on “return”. ISS is now confirming our view - as did Bengt Holström, this year’s Nobel Prize winner in economics.
We help our clients to get in front of this challenge
We fully understand that on the Board or in management they feel somewhat at the mercy of ISS. But they have the opportunity to proactively get in front of this issue: It is up to the firms themselves to define and propose to ISS the peer group they plan on using for the performance benchmark. They can define the details of the financial performance indicators they plan to report on, including adjustments. And with Obermatt, they can backtest the result and compare the outcome with their own managerial experience from running the business. With this approach, managers are at the controls of creating the basis for relative performance management, not just for their dealing with ISS, but also, and more importantly, for their communication with shareholders, employees and the possible and highly recommended inclusion in long-term incentive plans.
We are convinced that the new ISS rules will lead to a new assessment of the situation in Boards and Executive Management. Obermatt, in this business for more than 10 years, has accessed the relevant data points of over 10,000 companies worldwide. This puts us in a unique and optimal position to support and guide current and future clients on the journey ahead. At Obermatt, we are committed to this approach and can partner with our clients for the long-term.