Looking at the Long Term

Is three years a long time? It is if you are at the top of a fast-moving, global organisation. But if you are an investor? No. For an investor, the long-term extends beyond one economic cycle. That’s probably seven years or longer.

If you aren’t a Day Trader, you cannot predict when to get out of the market. For example, during the 3655 trading days of the bull market from 1990 to June 2002, you could have achieved annual growth of 11.1%, if you were fully invested. But if you missed the 10 best trading days, you achieved 8.3%. 6.5% if you missed the 20 best trading days.

You don’t know when to get out, so have to stay in.
For as long as Long-Term Incentives have been in place (since 1990, in the UK), they haven’t really been long-term incentive plans at all. More like Medium Term programmes.

This disconnect, between what the investor is looking for and how the executives are rewarded lies at the heart of the tensions played out in public over executive pay. No investor really begrudges high pay for really high performance. The problem of corporate governance and directors’ remuneration is that they suspect, rightly in many cases, that high performance isn’t sustainable in the long-term. Their long-term.