Case study: BAE Systems reshapes bonus scheme

Defence firm BAE Systems restructured its bonus scheme for executives as part of its efforts to reward those who contribute to its objectives, in order to follow recommendations set by Lord Woolf, the Lord Chief Justice, who started examining its business practices in 2007 when an investigation by the Serious Fraud Office was already well underway.

This year, for the first time, a quarter of any executive’s bonus will depend on them meeting objectives around ethics and safety. Among other targets, executives will need to illustrate they have embedded Woolf’s objectives into their business area and that staff get proper training on the recommendations.

Later this year, the ethics targets will change to reward executives who show they have had external confirmation of completing the implementation of the Woolf review.

Debbie Allen, managing director of corporate social responsibility (CSR) at BAE Systems, says 15% of the non-financial element of the bonus is related to objectives in the areas of safety and ethics.

“Those are reviewed by the board committee on CSR and approved by the remuneration committee, so it is not given lightly,” she says.

Lord Woolf’s report in 2008 made 23 recommendations, and BAE Systems pledged to adopt the new way of working within three years.

Before Woolf conducted his review, BAE Systems established a new code of conduct which states that employees, advisers, consultants, distributors and joint-venture partners must not offer, make or receive bribes or corrupt payments.

“We had a number [of codes of conduct] around the organisation and we had been in heavy acquisition mode,” explains Allen. “We had grown, particularly in the United States, where we went from 6,000 to almost 50,000 employees over four or five years. We had a lot of heritage, cultures, companies, and legacy ways of doing things.”

BAE Systems was never convicted of bribery or corruption, but it did have to pay huge settlements for misreporting accounts. In 2010, it was fined $400 million after pleading guilty to conspiring to make false statements to the US government. The company also agreed with the UK Serious Fraud Office that it would pay a penalty of £30 million after admitting one charge of breach of duty for failing to keep accounting records in relation to payments made to a former marketing adviser in Tanzania.

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