Executives rewarded for hitting non-financial targets

Executives are increasingly being rewarded for factors other than financial performance to encourage them to engage in overall business strategy.

The use of non-financial measures to determine reward has risen from 35% of bonus schemes last year to 57% this year. According to the Executive Compensation, Review of the Year 2007 annual report from PricewaterhouseCoopers, in the FTSE 100, the measures used now include: customer satisfaction, levels of employee engagement and health and safety, shareholder measures, market share, environmental measures and risk management.

At board level, fewer than 20% of companies now rely solely on financial performance measures in their annual bonus schemes. According to the report, incorporating non-financial targets into bonus plans can deliver benefits including a focus on the long-term and improved communication of the business strategy.

Tom Gosling, partner at PricewaterhouseCoopers, said that companies have realised the importance of tracking non-financial indicators of performance such as customer satisfaction and employee morale for some time, and there is now a significant trend towards incorporating such targets into bonus plans.

“This can reinforce to employees the importance that the organisation attaches to these measures, and can help communicate strategy in a powerful way. However, companies need to guard against the law of unintended 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,” he explained.