Executive Incentive Schemes: an Analysis of Their Influence on Corporate Performance
EXECUTIVE INCENTIVE SCHEMES: AN ANALYSIS OF THEIR INFLUENCE ON CORPORATE PERFORMANCE
Most business environments are complex - with intensive competitive activity (including newcomers) and high stakeholder expectations.
Thus ongoing improvements in corporate performance (including better resource allocation and asset utilisation) become critical factors for company profitability and sustainability of their business models. Consequently, many directors are getting substantial rewards in the form of monetary-based incentive schemes as personal rewards for driving their direct-reports to pre-determined target performance levels.
This however poses a question; what relationships exist between these schemes and ultimate organizational performance achieved in a reference period?
Financial measures may be used to measure the performance achieved of a given company after the implementation of a successful executive incentive scheme.
From such an analysis, a positive relationship may be proved to exist, but other factors could also strongly influence the performance of a company.
Thus we should establish some fundamental rules for the design of incentive schemes.
Rule number one:
Rewards should not encourage dysfunctional behavior by individual executives
Such as maximising financial benefits largely for themselves (a fundamental prerequisite of performance related pay).
Rule number two:
Incentive schemes should be fully aligned with time-related and agreed corporate strategic objectives
Some of which may be soft issues –such as changing a corporate culture to make it more ‘entrepreneurial’.
There is strong evidence in the literature to indicate that an organisation’s behaviour will change if the way performance is measured!
Conclusion: what gets measured gets done
Thus to ensure that executives do have the overarching interest of shareholders as their primary motive, they should be
Most business environments are complex - with intensive competitive activity (including newcomers) and high stakeholder expectations.
Thus ongoing improvements in corporate performance (including better resource allocation and asset utilisation) become critical factors for company profitability and sustainability of their business models. Consequently, many directors are getting substantial rewards in the form of monetary-based incentive schemes as personal rewards for driving their direct-reports to pre-determined target performance levels.
This however poses a question; what relationships exist between these schemes and ultimate organizational performance achieved in a reference period?
Financial measures may be used to measure the performance achieved of a given company after the implementation of a successful executive incentive scheme.
From such an analysis, a positive relationship may be proved to exist, but other factors could also strongly influence the performance of a company.
Thus we should establish some fundamental rules for the design of incentive schemes.
Rule number one:
Rewards should not encourage dysfunctional behavior by individual executives
Such as maximising financial benefits largely for themselves (a fundamental prerequisite of performance related pay).
Rule number two:
Incentive schemes should be fully aligned with time-related and agreed corporate strategic objectives
Some of which may be soft issues –such as changing a corporate culture to make it more ‘entrepreneurial’.
There is strong evidence in the literature to indicate that an organisation’s behaviour will change if the way performance is measured!
Conclusion: what gets measured gets done
Thus to ensure that executives do have the overarching interest of shareholders as their primary motive, they should be