A team of Morgan Stanley analysts published an interesting research note on Wednesday, covering executive compensation in the auto, airline, aerospace, and freight industries.
The research covers a lot of ground, so we zeroed in on the auto sector, as Morgan Stanley analyst Adam Jonas, who contributed to the note, has been for several years outlining a far-reaching investment thesis that predicts widespread disruption of the industry by new technologies. He’s calling this “Autos 2.0.”
“We would like to see auto companies move towards a target pay structure of greater long term vs. short term pay than the current average, and a five year vesting period on equity awards,” the analysts wrote.
Morgan Stanley’s team thinks that this would “incentivise CEOs to focus on long term positionality and profitability” and lead to reward for successful “long term strategic thinking.”
Such thinking could take many forms. For example, the Frankfurt Motor Show is currently underway in Germany, and a welter of new electric concept cars are taking the stage. The question for industry observers, when trying to figure out if this is strategy or marketing, is whether electric vehicles really will rise above their currently meager 1% global market share in the next 10 years and displace gas-powered vehicles.
If a CEO bets that they will, he or she could still be catastrophically wrong. One potential risk is that a big investment in EVs won’t matter if self-driving technologies arrive rapidly, are installed on gas-powered cars, and crush the market for individual vehicle ownership, electric or old-school.
Another risk is that the thinking will be too long-term and too strategic. Morgan Stanley’s team argues for broader timelines to encourage “long term profitability in the face of sector disruption,” but executives who signed on for the aggressive development of hybrids and smaller cars in the mid-2000s and into the financial crisis got burned badly when the market shifted decisively away from those vehicles and back to big pickup trucks and SUVs, as gas prices plummeted several years ago.
Strategic thinking is great, but executives should also get paid appropriately for understanding the dynamics of their industry in the here and now — and acting accordingly.