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For long-term investors, executive compensation is an investment issue. The design of a plan can reinforce the decisions that sustain growth or reward results that prove less durable.
Key Points
- Executive pay influences decisions that determine long-term returns, from reinvestment and acquisitions to buybacks and risk taking.
- Performance measures should reflect how a particular business creates value and evolve as it matures; a headline payout alone says little about alignment.
Informed engagement tests the measures, time horizon, and downside of a plan. Clear disclosure lets shareholders judge whether outcomes justify pay.
A Lesson in Ownership
As a teenager, ServiceNow Chairman and CEO Bill McDermott bought a delicatessen, financing much of the purchase with borrowed money. A missed repayment could have cost him the business. Customer service, cost control, and disciplined execution were therefore immediate concerns, as was the commitment of the people working alongside him. The experience made the connection between incentives and daily decisions tangible.
At a public company, executive pay gives a board a way to reinforce that connection. It can influence how management reinvests, prices acquisitions, buys back shares, and balances growth against risk. For long-term shareholders, those decisions shape the quality of earnings, the durability of cash flows, and the capacity to reinvest at attractive returns.
The influence of incentives on those decisions makes executive compensation a critical part of our investment analysis. A sound plan should align management with shareholders while reflecting the company’s strategy, competitive position, and stage of development. As of September 30, 2026, we have had 12 engagements on executive compensation with portfolio companies. We may vote against a plan when it appears excessive or opaque, or when its incentives do not support the business’s long-term trajectory.
Research on executive incentives shows why timing and targets matter. Alex Edmans, a finance professor at London Business School, and his coauthors found that growth in research and development and capital spending tended to decline as more CEO equity approached vesting.¹ Heitor Almeida, a professor of corporate finance at the University of Illinois, and his coauthors found that buybacks driven by short-term earnings-per-share incentives were associated with lower long-term productivity.² Neither finding makes equity awards or buybacks inherently problematic. Both direct attention to the decisions a plan may encourage before a payout is earned.
Measures Should Fit the Business
The right operating measures depend on how a business creates value and what management can control. A subscription company depends on retaining customers and expanding relationships, while an asset-intensive company may depend more on reliability, safety, and returns on capital. Standardized proxy guidance can flag concerns across many companies, but uniform screens may miss such differences. We use that guidance as an input, alongside the economics of the business and the plan as a whole.
ServiceNow and the Value of Business Context
For several years, we supported a performance measure in ServiceNow’s long-term incentive plan that proxy advisors opposed. In a subscription model, retaining and expanding customer relationships matters as much as landing new customers. Our analysts believed the measure captured both sources of growth. We could explain why it fit ServiceNow’s economics even when a standardized screen suggested otherwise.
Our aim was to help the board pressure-test whether the measures, time horizon, and mix of incentives reflected the business’s long-term value drivers. ServiceNow subsequently refined its plan in response to broader shareholder feedback and its own review. We continued to support its direction; the engagement was about the fit of the plan, not prescribing its formula.
Engagement Can Improve Duration and Disclosure
Compensation plans can change each year as a company moves from early growth toward mature scale. Boards must balance motivation and retention against simplicity, accountability, and a time horizon that fits the strategy. Pay is also visible to employees and the public, adding to those trade-offs. Yet even lengthy proxy statements may leave shareholders unable to see how results translate into awards. When the mechanics are unclear, it is difficult to judge alignment.
In a May 2026 discussion with On Holding’s investor relations team, we welcomed a move from two-year to three-year vesting and discussed with the company the possibility of four or five years over time. We also discussed a holding period after vesting or a share retention requirement to extend executives’ exposure to outcomes. Separately, we discussed clearer disclosure of short- and long-term incentive structures, including payout thresholds, targets, and maximums. Those discussions addressed both the duration of the incentive and shareholders’ ability to assess it.
Our concentrated portfolios and focused analyst coverage give us detailed knowledge of individual businesses. The stewardship team brings a perspective across the portfolio. As meaningful shareholders, we can bring both views to discussions with boards, governance teams, and investor relations teams.
Different Markets Bring Different Questions
Pay debates vary by market. In the United States, scrutiny often centers on the size of awards; in parts of Europe, boards may also weigh whether pay is sufficient to retain leadership talent. Shareholder votes may be advisory or binding, changing the tools available for engagement.
At Hermès, we recognized strong performance and saw a case for higher pay when supported by execution and growth. We also raised the absence of a long-term incentive and a clawback or malus policy. The former could connect awards more explicitly to sustained performance; the latter could provide a safeguard if a payout later warranted review. Our concern was with the structure of the plan, not any identified instance requiring recoupment.
Zalando and the Limits of Headline Pay Figures
In 2019, Zalando introduced a five-year plan for its co-founders and co-CEOs, David Schneider and Robert Gentz. It paired a low base salary, unusual by German standards, with demanding targets tied in part to doubling sales and tripling the share price. Public attention focused on the potential payout. We asked whether the design suited a business whose growth increasingly resembled that of a technology platform.
A meaningful share of target compensation depended on longer-term results rather than a single-year milestone. Executives also had to reinvest part of their net payouts in Zalando shares and hold them, extending their exposure beyond the moment a target was met. We assessed whether that design encouraged an ownership mindset rather than a focus on a near-term share price. As the company matured, we encouraged a profitability measure alongside revenue growth. A profitability measure was later added to the plan following broader shareholder feedback.
The Test for Long-Term Alignment
In assessing a plan, we ask whether its measures reward decisions that strengthen the business’s long-term economics, whether management shares in disappointing outcomes, and whether shareholders can understand how performance determines pay. Growth targets, for example, should not reward scale at the expense of returns. Boards may need discretion, but they should explain when they use it and how it affects awards; calling it informed judgment does not replace that explanation.
Compensation cannot eliminate the trade-offs involved in running a business. Well-designed incentives can, however, reinforce disciplined investment and accountability over time. That is why informed, company-specific dialogue on pay remains an important part of our stewardship work.
1 Alex Edmans, Vivian W. Fang and Katharina A. Lewellen, “Equity Vesting and Investment,” The Review of Financial Studies 30, no. 7 (2017): 2229-2271.
2 Heitor Almeida, Nuri Ersahin, Vyacheslav Fos, Rustom M. Irani and Mathias Kronlund, “How do Short-Term Incentives Affect Long-Term Productivity?” The Review of Financial Studies 39, no. 1 (2026): 114-157.
Disclosures:
The views expressed are the opinion of Sands Capital and are not intended as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell any securities. The views expressed were current as of the date indicated and are subject to change.
This material may contain forward-looking statements, which are subject to uncertainty and contingencies outside of Sands Capital’s control. Readers should not place undue reliance upon these forward-looking statements. There is no guarantee that Sands Capital will meet its stated goals. Past performance is not indicative of future results.
All investments are subject to market risk, including the possible loss of principal. Recent tariff announcements may add to this risk, creating additional economic uncertainty and potentially affecting the value of certain investments. Tariffs can impact various sectors differently, leading to changes in market dynamics and investment performance.
Any holdings outside of the portfolio that were mentioned are for illustrative purposes only.
We may refrain from voting when issues arise that cause us to determine that voting proxies is not in the best interest of our clients or that it is not reasonably possible to determine whether voting proxies will be in the best interests of clients. Additionally, we do not vote in certain countries that require “share blocking,” due to the possible liquidity constraints that could result in the cost of voting outweighing the benefit to the client. Shares out on loan also may not be voted.
As part of our ongoing research, Sands Capital regularly engages with the management teams and, if appropriate, board members of portfolio businesses to better understand each business’s long-term strategic vision and management of risks and opportunities, including those pertaining to environmental, social, and governance (ESG) matters. The use of the term “active ownership” and Sands Capital’s engagement with management teams and board members do not involve any direct or indirect attempt to exert pressure to implement specific measures, change policies, or otherwise influence control over the issuer.
As of October 20, 2026, On Holding and Hermès were held in certain Sands Capital strategies. Zalando and ServiceNow are no longer held in Sands Capital strategies as of the publication date; they are included as examples based on engagement that occurred during our ownership period. These companies were selected because they are among those with which we engaged on executive compensation. These examples are not a complete list of engagements or results and should not be interpreted as indicators of investment performance or ESG impact. To receive a complete list of company engagements for the prior twelve months please contact a member of the Client Relations Team at 703-562-4000.
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