Non-financial measures have growing influence on executive pay

Dec 10 2007 by Brian Amble Print This Article

You might not believe it if you've just spent hours wrestling with a utility company's automated call system when all you want to do is speak to a human being, but public companies are increasingly looking at non-financial measures - like customer satisfaction Ė when it comes to setting levels of executive pay and bonuses.

According to the annual report on UK executive pay by PricewaterhouseCoopers, fewer than one in five companies now rely solely financial targets when setting pay and bonus levels.

In fact, the use of non-financial measures to determine executive reward has risen from around a third (35 per cent) of bonus schemes last year, to almost six out of 10 (57 per cent) this year.

These non-financial measures include customer satisfaction, levels of employee engagement and health and safety, shareholder measures, market share, environmental measures and risk management.

"Companies have understood for some time the importance of tracking non-financial indicators of performance such as customer satisfaction and employee morale," said PWC's Tom Gosling.

"Now we are seeing a significant trend towards the incorporation of such targets into bonus plans."

But as he also pointed out, incorporating non-financial targets into bonus plans isn't necessarily guaranteed to deliver the type of benefits that might be imagined. If a target is set, managers will often find a way of meeting it in a way that was not envisaged and with unintended Ė and often negative - consequences..

"Once these measures start being linked to pay, there is always the risk that they are met in ways that are detrimental to the business as a whole."

Overall, the report found that annual bonus opportunities have increased in FTSE 100 companies this year with one third of board directors receiving above 80 per cent of their maximum bonus potential.

New pay measures have meant there is more opportunity to receive some payout, even if profit or other financial targets are not met. Nevertheless, that still leaves five per cent of board directors who are receiving no bonus whatsoever.

But executive salary increases show no signs of slowing, remaining well above pay settlements for the average employee, increasing at around five per cent for senior executives, between six and seven per cent for board members and eight per cent for CEOs.