Remuneration and incentives

Interestingly, there are some significant parallels in relation to remuneration and incentives that can be drawn between some of the CA review findings and the proposed fourth edition of the Principles and Recommendations put out by the ASX Corporate Governance Council earlier this year.  A couple of the more obvious include the following:

• Companies should remunerate fairly and responsibly, and more specifically should design its executive remuneration to attract, retain and motivate high quality senior executives and to align their interests with the creation of value for security holders (stakeholders) over the short, medium and longer term.
• A (listed) entity should separately disclose its policies and practices regarding the remuneration of non-executive directors and the remuneration of executive directors and other senior executives.

Executive remuneration should be aligned with values, culture & ethical behaviour

In relation to the first item, the draft Corporate Governance Principles point directly to the need for Boards to strike a balance on remuneration to ensure that incentives for executive directors and other senior executives encourage them to pursue the growth and success of the entity over the short, medium and longer term, without rewarding conduct that is contrary to the entity’s values or risk appetite. CA has not performed well here.

Recommendation 32 of the review findings states that CA’s performance reviews and bonus scheme(s) be harmonised so that all versions take into account ethical and behavioural considerations as the basis for potential reward.

Furthermore, recommendation 33 of the review findings states that executive remuneration should be linked to performance measures relating to the culture of CA and – to a lesser degree – to the culture of cricket-in-Australia.

Regular employee engagement and feedback is key to aligning behaviours with core values and culture

As good as these recommendations may sound on paper, these aspects of incentive measures can lead to ambiguity and subjective outcomes which prove challenging for Boards to measure – and measurable outcomes are critical to effective performance reviews.

Our view is that more regular engagement with employees to provide feedback loops to address and adjust behaviours in relation to core values and the desired culture of the business are often more impactful.  With the help of capable leaders, this regular engagement and feedback cadence helps to embed the core values.

On the second item above, listed entity disclosure around remuneration policies and practices provides transparency to stakeholders about measures the entity has put in place to drive behaviour and reward employees.  As a result, stakeholders get the opportunity to engage with companies at Annual General Meetings from an informed basis, which in turn helps to drive more accountable behaviour from Boards.

Perhaps CA could take a leaf of the listed company world on this – particularly given many of the players are highly remunerated with bonuses and incentive linked to performance?  Additional transparency around the performance drivers that are in place may provide stakeholders with welcome visibility and confidence that the Board has this under control.

Final thoughts

The CA findings reinforce the need for executive and employee’s remuneration and incentives to form part of a well-constructed remuneration policy and set of practices that is set by the Board.  If you are in a senior leadership position within, or on the Board of, an emerging growth business and would like to understand more about “remuneration and incentives” and how to strategically establish and embed these to help drive high performance, get in touch with us here at Checkside.

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Traditional economic theories suggest that nothing can beat a cash incentive because, after all, how could a firm perfectly predict what an employee would choose to receive? On the other hand, there are various psychological reasons why a non-monetary incentive can be more beneficial to your firm than a cash incentive.

Cash bonuses are usually much appreciated; they do not always elicit the same psychological response as non-monetary incentives. Scott Jeffrey reviewed the psychology behind the benefits of tangible, non-monetary incentives. This blog aims to summarise some of these benefits and to serve as a reminder of the positive psychological effects a non-monetary incentive can generate.

Perceived Value of the Reward
Let’s hypothesise that a firm is offering a weekend away as reward for an employee’s hard work. Unlike a cash bonus, the economic value of a weekend away is unknown. This means the employee has to guess or ‘feel’ the worth of the reward. Because the feelings associated with a reward such as a weekend away can be very positive, the employee is likely to inflate the perceived value of the reward. Jeffery found that employees are therefore likely to put in more effort to receive the reward.

Justifiable Reward
Continuing with the example above, a weekend away may not have been something an employee could justify purchasing for themself. A weekend away is a luxury and not a necessity in comparison to something like mortgage repayments or other bills. If an employee were given a cash bonus, they may feel the need to spend it on necessities as opposed to treating themselves to a positive experience.
Offering a weekend away will allow an employee to have a guilt-free positive experience. Not only will it leave the employee with a positive feeling it will also create an association between the positive feeling and their hard work.

Recognition
An important part of any incentive is recognition. People want to be recognised for their hard work and great efforts. In our culture, it is a social faux pas to brag about your income. If a firm were to give a cash bonus to encourage an employee’s hard work, it is unlikely that employee will seek recognition from his colleagues through boasting about his/her lump sum.

However, if an employee received a weekend away, it would be more socially acceptable to broadcast the reward. Consequently, the employee can gain the recognition they deserve.  Their colleagues may even inquire about the prize and further encourage the winner. This reward will not only encourage the winner to continue to work hard but will also act as a social reinforcer, inspiring other employees to do the same.

Save the Firm Money
Lastly, from a purely financial point of view, it is important to remember that non- monetary incentives can cost a business less. Since the actual value of a non-monetary incentive can be ambiguous, it is prone to psychological influences and thus the perceived value of the incentive is greater than it would be with a direct cash bonus.

The post Increase performance with non-monetary incentives appeared first on Checkside.