the expectations treadmill

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1、P1:OTA/XYZP2:ABCc03JWBT347/MckinseyMay25,201011:57PrinterName:Hamilton3TheExpectationsTreadmillTheperformanceofacompanyandthatofitsmanagementarefrequentlymeasuredbytotalreturnstoshareholders(TRS).Thismeasurecombinestheamountshareholdersgainthroughanyincreaseinthesharepriceoveragivenperiodwit

2、hthesumofdividendspaidtothemovertheperiod.Thatsoundslikeagoodidea:ifmanagersfocusonimprovingTRStowinperformancebonuses,thentheirinterestsandtheinterestsoftheirshareholdersshouldbealigned.Theevidenceshowsthatthisisindeedtrueoververylongperiodsofmorethan10yearsatleast.ButTRSmeasuredoverperiods

3、shorterthan10yearsmaynotreflecttheactualperformanceofacompanyanditsmanagementfortwomainreasons.First,improvingTRSismuchharderformanagersleadinganalreadysuc-cessfulcompanythanforthoseleadingacompanywithsubstantialroomforimprovement.Thereasonisthatacompany’sprogresstowardperformanceleadershipin

4、anymarketwillattractinvestorsexpectingmoreofthesame,pushinguptheshareprice.Managersthenhavetopulloffherculeanfeatsofrealperformanceimprovementtosatisfythoseexpectationsandcontinueim-provingTRS.Wecalltheirpredicamentthe“expectationstreadmill.”Clearly,managers’capacitytoinfluenceTRSdependsheavi

5、lyontheirbusiness’sposi-tioninthecycleofshareholderexpectations,fromstart-uptomaturity.Butthispositionisbeyondtheircontrol,makingTRSinisolationanunfairmeasureoftheirperformance.Second,whenTRSisanalyzedinthetraditionalway,itdoesn’tshowtheextenttowhichimprovementsinoperatingperformancecontribu

6、tedtothemeasureasawhole.However,improvedoperationsconstitutetheonlypartofthemeasurethatcreateslong-termvalueandisalsowithinmanagementcontrol.45P1:OTA/XYZP2:ABCc03JWBT347/MckinseyMay25,201011:57PrinterName:Hamilton46THEEXPECTATIONSTREADMILLThewidespreaduseoftraditionalTRSasameasureofmanagemen

7、tper-formancethereforecreatesperverseincentives.ManagersrunningfulltiltontheexpectationstreadmillmaybetemptedtopursuelightweightideasthatgiveanimmediatebumptotheirTRS.Buttheywilllikelyrealizesuchideasattheexpenseofmoresolidinvestmentsthatwouldyield