Rewarding the Right Performance

March 4, 2010
  • Peder Michael Pruzan-Jorgensen

    Former Senior Vice President, BSR

A French weekly magazine recently reported on its front page, “They are doing it again.” And by “it” they were referring to yet another banker’s feast of exorbitant bonuses as reward for the sector’s “terrific year.”

Much as we were locked in debate in the late ‘80s and early ‘90s when options were introduced as a means for rewarding management’s performance, so again do we find ourselves grappling with compensation—and more importantly incentive—schemes to reward superior financial performance. Unfortunately, this debate continues to be focused on financial performance and schemes that incentivize management to deliver ever-increasing shareholder returns. As a result, we have a system that spurns excessive upside risk taking while leaving the equally excessive downside risk to taxpayers or other stakeholders—all in the name of short-term profits.

Don’t get me wrong, it’s important that we discuss how to reward superior performance. The problem is that rewarding just financial performance offers only a partial view of the bigger picture of the health and long-term success of a company. And we need to discuss what we reward as much as how we reward performance.

In this light, it was refreshing to read the other week that two Dutch companies have decided to include non-financial metrics in the compensation schemes of senior executives. The life-science company DSM took the view that its management should be rewarded on performance related to reduction of GHG emissions, improvement in workforce morale, and the introduction of “green” products. Even more interesting is that the scheme has come about through a process of stakeholder consultation, including not only investors but also trade unions, politicians, and workers.

Similarly, TNT, the Dutch mail operator, unveiled plans that included customer satisfaction. This comes at the same time that oil giant Shell introduced a new management compensation plan that links to the company’s rating on the Dow Jones Sustainability Indexes.

These are not entirely new developments, as other companies, such as Novo Nordisk, have long been rewarding their executives for ensuring performance across the triple bottom lines. But they are timely amid the current financial performance media maelstrom and help draw attention to the ongoing question about how to balance short-term profits with long-term performance. And, as recently concluded in a BSR report, these compensation schemes that look beyond financial performance are well aligned with the growing emphasis on non-financial metrics in the mainstream investor community. That being said, there is still a way to go, as even companies leading in the field of sustainability continue to struggle with aligning their procurement bonus schemes with the long-term objective of promoting sustainable supply chain, according to a recent BSR study.

So while compensation will continue to be high on the agenda, we can only hope that a more nuanced debate will evolve that is focused less on the size of the reward and more on the performance that is rewarded.

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