What boards need to know to improve remuneration policies

Tuesday, 08 October 2019

David Yong MAICD photo
David Yong MAICD
Partner People Advisory, Remuneration and Reward, BDO

    The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Hayne Royal Commission) has put rewards and remuneration policies under the microscope. Misconduct revealed through the Hayne Royal Commission has been driven in part by organisations utilising rewards programs that champion short-term financial goals and inconsistent governance practices.

    The Commission has demonstrated that remuneration policies affect company culture, with employees driven by short-term financial gain potentially motivated to act outside of or contrary to customers’ best interests.

    No matter the sector, boards need to take note of the changing tide in rewards and remuneration programs and conduct more regular reviews of core policies to ensure they are fit for purpose.

    Reviewing and recalibrating remuneration

    In the modern workplace, ongoing assessment of core business processes and policies is crucial to keeping up with digital transformation, employee expectations and industry best practices. Rewards and remuneration policies should be no exception - businesses that have never analysed their existing programs could be missing out on their true potential.

    There is no industry accepted best practice for how often you should conduct this assessment, but an annual review is most common. Any less frequent and you could miss out on noteworthy factors that reduce staff work ethic or business loyalty - any more regularly and it’s a case of diminishing returns. This periodic health check should help to generate valuable insights into how your employees feel about your rewards.

    In undertaking an annual review, companies should look beyond benchmarking market remuneration practices. A review should investigate the efficacy of reward practices against stated program objectives. For example, companies can undertake analytics on the correlation between remuneration outcomes against both financial and non-financial metrics. An annual review should also shed light on employee turnover, helping you better understand recruitment and talent availability patterns.

    Boards also need to consider the objectives driving remuneration packages. Meeting annual business goals with monetary incentives is the most common structure in a rewards program. However, there are often challenges in reconciling or aligning these annual goals with longer-term success, or with core enterprise values.

    Every employee goal, especially for those managing customers and attracting new business, should be underpinned by your organisation’s values. This ensures staff are recognised for long-term value-added work, such as high levels of customer retention and satisfaction or process and product innovation, rather than for a one-off activity with an immediate financial impact alone.

    Determining where rewards, culture and governance align

    Many businesses are making the shift to realign remuneration policies, especially at the executive level, to fit more intuitively within defined enterprise culture and governance structures. However, this shouldn’t mark the end of shorter-term rewards, or use of financial incentives. Instead, businesses need to determine how remuneration fits into wider enterprise culture and design a governance structure that encourages more ethical rewards.

    One of the key changes in this regard has been the wider adoption of models that reward team or business outcomes, rather than focussing on individual successes. So, if a business meets a key goal, like making a certain number of sales, this means rewards are shared across all contributors, rather than offering a lump sum to a single sales person. Under such models, there is greater motivation for participants to provide internal checks and balances.

    Another factor to consider when changing remuneration policies is how good performance between different team members is differentiated and built into a people-focused culture. Success will vary between members of your organisation, and may not be financially driven, so ensure rewards policies lay out measures specific to individual teams in different departments. Bringing remuneration in line with your company values also needs to have the right governance structures to ensure the program is fit for purpose and evolves as your organisation evolves.

    Designing a suitable remuneration program

    The first step towards making significant changes to your remuneration program is to design a governance structure that can assess where your current policies may be failing. Any committee’s background and purpose will differ depending on the size of the organisation, the industry they practice in and the resources available.

    In light of the controversy around rewards within the financial services sector, organisations in banking, superannuation and financial services should consider improved reporting from management to the board with respect of any potential risk factors that could adversely impact remuneration outcomes.

    While the Hayne Royal Commission and the Australian Prudential Regulatory Authority have noted the negative impacts of financial metrics on conduct, companies will need to continue measuring financial outcomes. The key is for companies to move away from the question of “what are the market practices?” to assessing the appropriateness of the metrics in the context of business strategy, identifying the key value drivers and calibrating the targets to ensure a balance between shareholder interests and customer outcomes.

    Another important step to ensuring your rewards policies are suitable is to standardise how you measure non-financial goals. Moving remuneration programs away from short-term financial targets means that you need to define how success is measured. Traditional tools to consider include employee satisfaction surveys, or using customer retention/satisfaction data, tracked year-on-year.

    However, there are often too many other extenuating factors to make these processes an accurate means of measuring non-financial success alone. Instead, pulse surveys, sent more regularly, should build up a more accurate impression of employee satisfaction. Net promoter scores, a measure of customers’ willingness to recommend a company’s products or services to others, are also effective. While these measures are not perfect and remain subjective, they are good catalysts to promote conversations at board level to gain a greater appreciation of key non-financial matters that could impact the organisation’s reputation.

    A final step is to consider seeking impartial third party guidance. Business process specialists can assess your remuneration and rewards policies with an eye towards better aligning it with company values. This advice can go a long way to incentivising employees to focus on long term, customer-driven goals that will benefit your organisation down the track.

    Source: aicd.companydirectors.com.au/membership/membership-update/how-to-strengthen-remuneration-governance

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