Secretive targets for CEO bonus pay signal poor performance

ScienceDaily | 10/16/2019 | Staff
Bonus pay, which can be up to five times a CEO's base pay, is usually based on a mix of "hard" financial targets such as profit, underlying earnings and total shareholder return, and non-financial or "soft" targets, such as sustainability, customer satisfaction and culture.

The most recent egregious example of a CEO collecting a large bonus followed by poor performance would be Peter Fankhauser, chief executive of collapsed travel company Thomas Cook, who received a £750,000 bonus in 2017, two-thirds of which was in cash, according to the BBC.

Researchers - Targets - Remuneration - Reports - Targets

The researchers found that non-financial targets were not necessarily bad however, as remuneration reports with clearly defined and measurable "soft" targets, particularly those related to corporate social responsibility, were associated with better future firm performance.

The research paper: Powerful CEOs, cash bonus contracts and firm performance, recently published in the top, peer-reviewed Journal of Business, Finance and Accounting was led by University of Technology Sydney accounting researcher Rebecca Bachmann, together with Dr Anna Loyeung and Dr Helen Spiropoulos.

Bonus - Payments - Metrics - Risk - Culture

"While bonus payments linked solely to hard financial metrics risk fuelling negative culture and conduct, our research shows that non-financial performance measures also need to be transparent and measurable," says Bachmann, who conducted the research as part of her Honours thesis.

"More than 40% of the ASX firms we looked at did not disclose anything about their non-financial performance targets. The concern is that non-financial measures are easier to manipulate, so may be rewarding CEOs for activities that should be part of their job," she says.

Bachmann - Notes - Firms - Targets - Reasons

Bachmann notes that firms often say they don't disclose non-financial targets for proprietary or competitive reasons, however the finding that undisclosed targets are associated with negative subsequent firm performance suggest these targets are not working in shareholders' interests.

"It may be that powerful CEOs incorporate undisclosed non-financial measures to increase compensation above what is...
(Excerpt) Read more at: ScienceDaily
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