Rewards and sanctions for management*

In other articles we have discussed delegating responsibility and activity, and control procedures to ensure that the board is able to monitor and manage the performance of the organisation.

The next step is to ensure that senior management's successes and failures are communicated to them, and to ensure that appropriate rewards, sanctions and training are implemented.

Practical aspects of performance management are important because they relate closely to motivation. It is a truism that "What gets measured gets done". However, there is another consideration. Rewards that involve cost are a call on shareholders' assets.

The whole subject of bonuses, in particular, can be a hot potato in the media and at shareholders' meetings. Furthermore, bonus schemes rapidly become out of date as the context and objectives change.

There are three broad types of incentive: financial (e.g. bonuses or penalties); operational (e.g. training/development, or granting more or less responsibility); and reputational (e.g. status or public acclaim/criticism).

When setting up incentive systems, it is worth assessing the motivations of the key players, including the balance between financial and other motivations, and whether they operate at organisational, team or individual level.

Check that they only relate to outcomes over which the players have control or significant influence.

Link the incentives to performance measures which lead to the desired (long-term) outcomes in a predictable way. A single measure may not capture the relevant aspects of performance, but any set of measures must be kept manageable.

Ensure the rewards and sanctions are cost-effective. Where they involve financial elements, it may be sensible to model the operation of the system to help define appropriate values or ranges.

Introduce safeguards to prevent unintended behaviours. Approaches can include maintaining a degree of independence in performance assessment and validating key performance measures.

Build regular internal and external reviews of the effectiveness of the sanction or reward mechanism into the programme's overall performance management cycle.

Consider phasing in any new sanction or reward mechanisms gradually, or on a pilot basis, to identify and address any dysfunctional behaviour.

Corporate governance

Has the board reviewed its strategy for performance management of senior executives?

  • Communicate its conclusions directly or by delegation to members of the management team quickly and effectively?
  • Insist that rewards or sanctions are executed promptly?
  • Consider what training and development would improve management's effectiveness?

* Inspired by the Institute of Directors Standards for the Board

What to do next

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