Are bonus plans reflecting the broader boardroom picture?

Duncan BrownDuncan Brown Director, PricewaterhouseCoopers: Practicing what you preach? Reflecting a broader stakeholder agenda in executive bonus plans.

Have you put your coffee cups and waste paper in the recycling bins at the office today? Corporate social responsibility is affecting all of us in today’s workplace, and recent reforms to the Companies Act established a statutory duty for UK directors to take account of the interests of all their stakeholders, including employees and customers, in their decision-making.

But what’s the evidence that our largest companies are putting their money behind their fine principles and rewarding a broader range of criteria, beyond just the profits and returns to shareholders, in their executive bonus plans?

PricewaterhouseCoopers Monks latest annual survey of incentive plan practice in the UK reveals a major shift is occurring. The maximum annual bonus for FTSE 100 chief executives increased to an average of 123% of salary, up 20% on the previous year.

Yet at the same time, the number of companies basing bonuses purely on financial performance measures halved to just 17% with a corresponding jump in those setting personal and non-financial targets for their managers and executives. One-third of the average UK executive’s annual bonus is now based on non-financial targets.

The most popular non-financial measures being used include customer satisfaction and employee commitment, while environmental targets are also evident, particularly in utility companies. Thus at one FTSE 100 company 50% of the annual bonus is dependant on an operating margin target, 25% is dependant on hitting customer satisfaction levels and 25% on the progress of a major project.

As with any reward changes, there are risks in moving your bonus plans in this direction, notably a loss of clarity and focus in objective setting, and the use of unpredictable and untested performance measures.

But [if properly implemented] they can deliver a number of benefits including better aligning the bonus plan with the organisation’s business strategy, and enhancing the motivation of managers. To realise the potential benefits, they need to be carefully designed and delivered, with an appropriate balance of structure and flexibility in the plan, and extensive communications and training in their operation.

With the shift to reflect a broader stakeholder and CSR agenda in corporate boardrooms, it is not surprising and probably desirable that bonus plans are reflecting performance goals and achievements in these non-financial domains. It is an old truism that “what gets measured gets done”, and so does what’s bonused.

‘Good’ companies in today’s environment really are just that – to their shareholders, customers, employees and community. And good companies need good bonus plans.

Duncan Brown
Director, PricewaterhouseCoopers
Duncan.i.brown@uk.pwc.com