The Importance Of Strategic Or Non-financial Performance Criteria In Variable Remuneration

Performance criteria in variable remuneration

Traditionally companies have been focused on achieving their financial targets but have, to some extent, ignored the importance of their longer-term, non-financial and strategic goals. This focus has influenced how staff have been rewarded, in that the performance conditions attached to incentive plans have been largely financial. 

Today’s corporate culture is far more socially aware, and as a result, non-financial objectives are more of a necessity than a trend. Companies will have to meet a minimum set of non-financial standards to keep up with competitors, comply with regulators and attract the right talent. And undoubtedly, one of the best ways to uphold these standards is to integrate them into company incentive structures.

The rising importance of environmental, social, and corporate governance criteria 

The pressure of environmental, social and corporate governance (“ESG”) issues is forcing corporates to change their behaviour towards ESG responsibilities and monitor management’s achievement of these goals. Restrictions enforced by the Paris Agreement and Carbon Tax laws, for example, have put increasing pressure on major companies to make real changes. In addition, the Nasdaq, America’s second-largest stock exchange, has said it will set binding gender and diversity targets for its listed companies. 

Companies that pivot toward tackling ESG issues and realign themselves to broader stakeholder interests will have a competitive advantage over those trying to ignore these corporate responsibilities. And what better way to communicate this realignment than to have incentives set up to achieve socially and environmentally responsible targets? By integrating concrete ESG targets into their corporate strategies and instituting ESG performance indicators for executives, companies will begin to walk the socially and environmentally responsible walk.

Supplementing the financials with other non-financial metrics

Financial performance indicators such as growth in profitability (represented by various earning metrics) are undoubtedly crucial to measuring company progress. But are we forgetting what else signifies that a company is moving forward? 

Growth indicators such as increased client satisfaction, better product quality, and lower staff turnover quite often reveal the progress of a company in ways that financial metrics cannot. In this way, non-financial objectives can influence positive behaviours, which the financial metrics often miss. Innovation objectives, for example, are usually a part of core strategies as they ensure companies keep up with changing markets. 

Attaining these non-financial objectives should be formalised within executive’s targets and incentives. To achieve this, companies should set holistic KPIs for executives that address every aspect of their long-term strategy, including financial and non-financial strategic targets.

How does this affect employee incentives?

Covid’s negative impact on corporate financial performance has reinforced the importance of incorporating holistic KPIs into executive incentives.

During this crisis, financial targets have not always been met, and, as a result, several employee awards have not vested. This has disheartened many employees as their efforts to reach share bonuses have been entirely toppled. Conversely, due to their partial independence from market conditions, non-financial objectives have been less affected and have still been achieved in many cases. So employees who have had incentives linked to both financial and non-financial targets have been better off during the recent market crisis.

This reinforces the need to have the right balance of financial and non-financial performance criteria. Even if non-financial targets have not yet been considered in granting awards, it is not a train smash! Companies’ remuneration teams should be agile enough to re-evaluate their ongoing reward strategy based on current market drivers to allow them to incentivise staff accordingly.

Design all grant conditions with just a few clicks using ShareForce

When designing incentive plans, it is vital to back up your reward decisions with numbers that reflect all market conditions. ShareForce provides companies with the flexibility to design, test, and value various performance-linked incentive plans (including incentives with financial, non-financial and strategic objectives) under several market scenarios. 

In addition, stakeholders from across the company can track the performance of their incentives through the award lifecycle, allowing rewards teams to be agile and proactive in their approach to issuing new incentives.

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