What role should incentives play in rewarding senior management?
What should be the relative impact of financial results, the quality of leadership, innovation, customer retention, the quality of services and products?
Should some elements of an organisation’s performance become gateways before incentives are payable?
Would some of the factors considered as gateways or modifiers of incentive payments include the following:
- Adherence to good governance and code of conduct principles
- Safety and environment
- Gender balance in the workforce
- Employee engagement, culture and diversity
Shareholders and commentators have expressed varying views in relation to what should be the key levers for incentive payments. More recently there has also been an increased focus on employee capabilities, skills and competence as a prerequisite to appointment.
The Federal Government and the ASX have in recent years required increased transparency in relation to the capabilities of Board members and their relevance to the company at varying stages in their development and/or maturity.
The current Royal Commission into banks and financial institutions has further highlighted shortcomings in the management of incentive payments cascading either down from senior management or cascading up from less senior staff.
While we understand that a significant number of organisations regularly review the performance hurdles or criteria for payment of incentives under annual incentive plans, two core fundamental axioms of performance measurement stand out in the light of the recent events:
- “What doesn’t get measured, gets forgotten.”
- “If you can’t see success, you’re probably rewarding failure.”
- “Good governance and ethical standards are paramount”
While accepting the above axioms as key drivers to focus management’s attention on the levers of performance improvement, if they are being rewarded for endorsing or supporting a culture which is antithesis of a sustainable business or reflects business conduct which is to the detriment of any key stakeholders, then the leadership team of the organisation and the Board who endorse these programs are failing their shareholders.
A fundamental imperative of enterprise sustainability is operating within a legal, moral and ethical framework.
Over the coming months we will explore the area of annual cash-based incentives and the criteria which applies and raise questions in relation to what is the purpose of fixed remuneration (an annual salary) and how critical is it to have a capable workforce and Board of Directors offering stewardship of the leadership team and ensuring, through various risk management protocols, that their governance principles are being adhered to throughout the organisation.