Home' HR Monthly : February 2019 Contents 6
hile shareholders attending recent annual general meetings
of financial institutions had the opportunity to express their
concerns about the banking royal commission’s findings, they
may still wonder what caused these organisations to go so far astray.
Certainly one cause was bonus remuneration practices.
Fixed remuneration for senior executives needs to be determined
by reference to the responsibility and impact of those roles, and also
to the competition for top people in national and global markets.
The evidence is that renumeration in Australia has been creeping up
on relative benchmarks due to the bull run in financial markets from
2010 to the middle of 2018, and the desire to preempt an exodus of
top talent over that period. With recent statements from board chairs,
it’s expected that boards will now push back on these pay levels. One
practice (not generally followed) is to fine an executive a share of his
or her fixed remuneration for poor performance, or for tolerating a
cultural weak ness in his or her area of responsibility, notwithstanding
the achievement of selected key performance indicators over the same
period. The preference is to terminate employment with an additional
severance payment under contract. This is a major weakness in
Australian bank board performance on executive pay, and it has created
significant community anger and loss of trust.
There are four core principles that should be used for good bonus
determination. Most, if not all, of these principles seem to have broken
down in our major financial institutions in the last five years.
The first principle is that a bonus should only be payable for
outperformance targets. Bonuses should not be used to compensate an
executive for doing their job effectively, as this is the purpose of fixed
remuneration. Bank boards should also determine no-bonus outcomes
unless a minimum of at least 60-75 per cent of all KPIs are achieved, and
not allow an additive trickle to be paid come what may. Board overrides
of zero bonus should also apply, as they do in companies like Qantas.
Evidence from senior professional members at AHRI is that there are
instances where pay for core job objectives has been pushed into bonus
formulae with low-bar achievement objectives, as a response to keeping
fixed remuneration within market and community expectations.
The second principle is that individual bonus incentives should be
given primarily for the individual’s role in helping a team perform to
its best, and team objectives should be focused on helping the team’s
individuals achieve their maximum potential. This is, and always has
been, the hardest principle to get right. During a bull run in markets, and
for highly competitive occupations, these characteristics quickly break
down into performance objectives driven solely by personal quotas.
The third principle is that in large and complex organisations, bonuses
should be structured across short, medium, and long-term incentives, but
with payment deferral and strong clawback provisions that are subject to
board discretion. Australian financial organisations are weak on deferral
and clawback provisions due to difficulties (perceived or imagined)
in retaining top staff. This can be compounded by the production of
top-level bonus forms and structures that then get pushed into general
staff roles during subsequent years. We might also blame the loss of the
KISS principle – Keep It Simple Stupid. Australian financial institutions
have a complex array of multiple incentive schemes, different vesting and
clawback provisions, and a succession of new-generation bonus schemes
that only superior data analytics systems could understand.
The fourth principle is that bonus schemes should be compatible for
efficient use across an organisation. If success in a role depends on high
personal sales performance and achieving specific quality or prudential
characteristics, individual incentives should form a high proportion
of potential bonus results. If a team is meant to focus on overall
organisational success, then group-based and not individual indicators
must prevail. Contamination and confusion of purpose and objective
occur when these characteristics get cross-pollinated, for so called equity
reasons, in organisations that have both types of roles. For example,
wealth management with mostly the former personal outcome-driven
roles, and retail and commercial banking services with the latter.
A major clean-up of remuneration structures needs to occur. The
extensive shareholder voting against remuneration reports is rational
and to be respected. Top financial boards now have a
year in which to change their systems materially. This
will be a tall order because of the many breaches of
sound remuneration principles that have occurred
over the past few years. Incoming AMP chairman
David Murray is absolutely correct to state that
bonus schemes should be subject to absolute board
discretion. But then, with the two-strikes principle,
directors who wish to continue their current board
service into 2020 have little choice.
Australian HR Institute chairman Peter
Wilson AM was formerly a group HR
executive at the ANZ Bank.
It’s timely to consider the four principles that can fix a broken bonus system.
BY PETER WILSON AM FCPHR AHRI CHAIRMAN
To read past Perspective columns by Peter
Wilson, visit hrmonline.com.au
24/1/19 3:20 pm
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