It could be argued that all financial measures are merely surrogates for total shareholder return, which is defined as appreciation in stock price plus dividends paid to shareholders. The problem is each company can influence stock price through its performance, but it cannot avoid being affected by other market trends over which it has no control. Recessions, interest rates, and inflation are just some of the factors that can affect the company's stock price more than its own performance does. Critics like to point to Wall Street's fascination with the next quarterly earnings statement, while the Japanese are looking out ten years or more. This emphasis on the short-term creates a major problem for compensation planners.
Managers relate most strongly to annual incentives.
Wall Street analysts are not going to recommend the company's stock if the company has experienced four quarters of declining earnings, even if the company is spending much of its money positioning itself for success five years from now. Contributing to the planner's problem is the accelerating rate of change. Ultimately, executives should be rewarded for making the right decisions and executing them well. The business strategy must dictate the compensation plans, not the other way around. For example, a company may be in a business that is floundering.