In defence of STIs and LTIs: Why traditional incentive structures still matter

Executive remuneration continues to attract headlines and scrutiny. Investors, Boards, regulators and executives debate whether traditional frameworks remain fit for purpose in a rapidly changing world. Critics argue that annual incentives encourage short-term decision-making and that long-term incentives have become disconnected from management effort. Yet, despite these criticisms, one fact remains.

While short-term incentive and long-term incentive frameworks are not perfect, they remain a practical and widely understood mechanism for balancing short-term accountability with long-term value creation.

The central challenge facing any Board is deceptively simple. Shareholders want management to deliver strong results today while simultaneously investing for tomorrow. An organisation that focuses exclusively on short-term performance may sacrifice innovation, culture and strategic growth. Conversely, an organisation focused only on long-term aspirations risks losing the accountability required to deliver near-term results. Classic short-term incentive and long-term incentive structures seek to manage this tension.

Annual incentives provide accountability for immediate performance outcomes, while long-term incentives encourage executives to make decisions that support sustainable value creation. Alternative approaches can address particular weaknesses, but none has yet achieved broad acceptance as a consistently superior way to balance both objectives.

A fundamental principle of modern corporate governance is that executives should not receive substantial rewards unless shareholders also benefit. short-term incentive and long-term incentive structures support this principle by placing a meaningful portion of remuneration at risk. Simpler alternatives, such as a pure base salary and deferred shares subject only to service conditions, may weaken the direct connection between reward and performance and risk overpaying for underperformance.

Well-designed targets are therefore more than forecasting exercises. They clarify strategic priorities, establish accountability, provide a transparent basis for assessment and constrain unstructured discretion. Targets will never eliminate judgement, but a credible framework makes that judgement more disciplined and explainable.

Advocates for change often point to restricted shares, equity as fixed pay or discretionary reward models as possible replacements. However, these approaches introduce new problems of their own. Restricted share arrangements may reduce the performance linkage that shareholders expect. Fixed equity models can reward executives irrespective of achievement. Highly discretionary approaches may undermine transparency and consistency.

Replacing short-term incentive and long-term incentive frameworks may therefore substitute one set of imperfections for another.

Perhaps the strongest argument for retaining traditional incentive structures is their capacity to evolve. Modern remuneration frameworks look very different from those of twenty years ago. Boards have introduced deferral, shareholding requirements, ESG measures, clawback provisions, post-vesting holding periods and more sophisticated performance scorecards.

This architecture also provides a familiar and explainable governance framework for Boards, shareholders and proxy advisers. Separate short-term incentive and long-term incentive plans make the intended relationship between annual delivery and long-term value creation visible, while preserving clear opportunities for near-term recognition, long-term retention and sustained equity ownership.

Telstra offers an interesting example of this evolution. After operating a combined incentive plan that integrated short- and long-term reward, Telstra returned to separate short-term incentive and long-term incentive arrangements. Its experience demonstrates that simplification is not necessarily a one-way journey: a combined plan may be appropriate in certain phases of a company’s strategic context, while separate plans may later be better suited and enable a clear link for annual delivery and long-term value creation. The lesson is not that one model has failed, but that incentive architecture should evolve with business strategy, industry conditions, organisational maturity as well as the organisation’s remuneration principles and objectives which are equally capable of evolving over time.

These developments demonstrate that remuneration frameworks can adapt to changing expectations while retaining their core objective of linking reward with performance. The challenge for Boards is therefore not whether short-term incentive and long-term incentive plans should survive, but how measure selection, target calibration, deferral, ownership, discretion protocols and disclosure can continue to improve.

The debate surrounding executive remuneration is often framed as a choice between maintaining the status quo and pursuing something entirely different. In reality, the choice may be far more nuanced.

Traditional incentive plans are unlikely to be perfect, but perfection has never been the appropriate standard. The more practical question is whether an alternative can deliver a better balance of accountability, motivation, retention, alignment and governance. More importantly, Boards should not be tasked with choosing one over another – but instead ask the question, which framework is best suited to our business and people needs in the short, medium and long-term? And remaining open to evolving remuneration frameworks as the answer to this questions changes.