Monday, 4 February 2008

Linking executive pay to health & safety etc

Last year BP won praise from some quarters because it slashed its directors' bonuses in the wake of some serious safety failings, most notably the fatal Texas City Refinery blast. I have to admit I'm a bit troubled that they were awarded any bonus - it does make you wonder how many proles have to get blown up before directors recognise that it might not look good if they pay themselves some serious wedge for high performance.

But BP actually at least showed some awareness of the importance of these issues. Contrast that with the directors of Jarvis who were paid bonuses in respect of their performance in the year of the Potter's Bar rail crash. It might well be the case that the directors technically hit their performance targets for that year, but surely they could have still done the right thing and waived the bonus for that year? Right-wing critics of corporate governance reform often make the the valid points that even the best systems can't turn bad managers into good ones, and that personal integrity is exremely important. But then how do you deal with cases like Jarvis where the directors are quite happy to stick two fingers up to personal integrity?

One solution has been proposed by the Local Authority Pension Fund Forum today. They have called for directors' pay to be linked much more closely to the management of so-called non-financial factors. These might include things like health & safety, environmental management, employee satisfaction and so on. The idea is that directors would only get performance-related rewards if they manage these areas as well as traditional financial metrics. One of the interesting things that LAPFF has found is that even amongst the UK's biggest companies there is little linkage between the factors that businesses say are key performance indicators (KPIs) highlighted in their Business Reviews and the factors they use to calculate executive rewards.

The logic is simple. If a certain factor is important enough for it to be a "key" performance indicator, why aren't directors incentives to manage it? It's a shame that directors need to be incentivised to ensure that workplaces are safe and as environmentally friendly as possible. But equally it is ludicrous that incidents like the Potters Bar bonuses example occur.

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