Good bonus plans need non-financial measures
“What gets measured gets done and, in our experience, what gets rewarded gets done even quicker.” This is the view expressed by Duncan Brown, Director at PricewaterhouseCoopers, writing in a recent edition of the IDS journal Executive Compensation Review.
The quote refers to the fact that there is now general agreement that non-financial as well as financial factors are important to overall business success and if companies are to get people to focus on them, they need to be tied to reward.
Currently, half of FTSE 100 companies now use non-financial measures in bonus plans, a proportion, Brown says, that is likely to increase in the future. Nevertheless, he argues that simply incorporating non-financial measures into bonus schemes is not enough and, in order to be a powerful agent for change, arrangements need to be aligned with other initiatives associated with reporting, communication and performance management.
Why non-financial measures?
Among the main reasons why companies are using non-financial measures in their bonus plans, says Brown, is the increasing pressure they face to consider the environmental and social, in addition to the economic consequences of their activities.
In response, he says, some companies are putting corporate social responsibility (CSR) at the heart of their business strategies, while recent reforms to the Companies Act have also established a statutory duty for UK directors to take account of the interests of all their stakeholders, including employees and customers, in making their decisions.
Brown adds that a more hard-headed analysis of self interest may also be pushing organisations in the same direction, as more companies recognise that employee engagement and customer satisfaction are proven leading indicators of future financial success.
What’s being measured?
Looking across the FTSE 100, even at board level, Brown reckons that fewer than a fifth of companies now rely solely on measures of financial performance in their annual bonuses. This trend has accelerated recently.
He adds that one reason for the growth in individual targets is that they provide remuneration committees with a useful element of discretion in determining bonus payments.
More striking, Brown highlights the growth over the last year in the use of shared non-financial measures, such as customer satisfaction or employee engagement: up from 35% of bonus schemes last year to 57% now.
Brown suggests that such trends may be a result of organisations replicating the findings of research originally done by Sears showing strong relationships between employee satisfaction, customer satisfaction, and financial performance. Given this, he says, the wider use of these measures is not surprising and we might expect to see their prevalence increase, particularly those relating to customer satisfaction and employee engagement.
Multiple measures emerging
For other groups of staff, Brown says there is a similar trend towards multiple measures across a broader set of performance criteria. These include, for example, the replacement of individual sales commission systems with bonuses which, as well as sales, commonly reward customer satisfaction and team performance.
Similarly, in call centres, measures of customer satisfaction are being employed alongside more traditional sales and productivity targets, while factory productivity schemes are introducing a wider range of measures such as SPQ (safety, productivity and quality) plans.
Getting it right
Brown reckons that the following steps can help to maximise the benefits and minimise the risks of changing your annual bonus plan:
Don’t just rely on the bonus plan - the effectiveness of incentive plans is highly dependent on related areas such as the quality of performance management, reporting, and communications.
Only use measures where you have a reliable track record - when introducing totally new measures, use them for performance reporting and management purposes until they are reliable and understood and only then link bonus payments to them.
Retain some discretion - to provide protection against the law of unintended consequences.
Invest in training and communications with regular reporting and discussion regarding the non-financial measures, what affects them and how they can be improved.
Start simply - begin by using the most obvious and reliable measures, for example customer satisfaction, and use them with a low weighting, initially alongside traditional financial measures, increasing the weighting over time as confidence in the measures builds.
A final word
Brown concludes by quoting Scottish mill owner Robert Owen who 200 years ago proclaimed: “Philanthropy goes hand in hand with economic advantage”. And adds: “Today, even more than in Robert Owen’s time, it seems good companies really are just that: good to their shareholders, customers, employees and community. Whether this is real philanthropy or simply enlightened self-interest is of academic interest – as the secretary of state for trade and industry expressed it recently, we need more of them. And good companies need good bonus plans.”
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Title: IDS Executive Compensation Review, Incomes Data Services.
Incomes Data Services is the “leading UK information and research service on employment issues”, providing a range of publications for employers, trade unions, government departments and other agencies. Find out more at www.incomesdata.co.uk.
PricewaterhouseCoopers is one of the UK's leading professional service employing about 15,000 partners and staff in offices around the UK. For more information on the services PwC offers visit www.pwc.co.uk.