On November 9, 2016, the shareholders of Australia’s largest company, and the world’s tenth-largest bank, revolted. The Commonwealth Bank’s shareholders were reacting to the board’s annual Remuneration Report, which contained a recommendation that the CEO be granted a bonus based on what critics saw as “soft” measures. Other firms have ventured down this path, including the conglomerate Wesfarmers, with its 200,000-plus staff, and the global hospital operator Ramsay Health Care.
Should a CEO’s Bonus Be Based on Financial Performance Alone?
Boards around the world find themselves in a bind. For the last 20 years, they’ve gone down a path forged largely by U.S. corporations and global remuneration consultants, assessing CEO performance on financial measures like profit; earnings before interest and taxation; and total shareholder return. But boards and the firms they lead now find themselves dissatisfied with the result of this approach, and recognize that they can’t simply rely on “hard” measures to assess corporate performance and reward their CEOs and senior executives. Some corporations are now taking a further step to include subjective, or “soft” measures like customer satisfaction, employee diversity and inclusion, and company culture. But this has proved to be a step too far for some shareholders, who have rebelled. As a consequence, companies are firing off ad hoc responses rather than approaching performance measurement in a comprehensive way. Instead, they need to use a considered framework to develop a defensible corporate performance scorecard that produces both objective and subjective measures of performance. And they need to educate their shareholders about the thorny issue of using “soft” measures as part of CEO assessment.