‘Undefined’ non-financial targets linked to poorer performance

Firms need to improve their disclosure on non-financial measures linked to chief executive cash bonuses such as sustainability, customer satisfaction and culture or risk worse company performance.

According to a research paper from University of Technology Sydney (UTS), firms who had undefined ‘soft targets’ were associated with worse company performance.

Those firms which had clearly defined and measurable targets, particularly those related to corporate social responsibility, tended to perform better than those without.

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Report author, Rebecca Bachman, said: “More than 40% of the ASX firms we looked at did not disclose anything about their non-financial performance targets. The concern is that non-financial measures are easier to manipulate, so maybe rewarding CEOs for activities that should be part of their job.

“It may be that powerful CEOs incorporate undisclosed non-financial measures to increase compensation above what is justified by the economic performance of the firm. We argue that cash bonuses can be a means to camouflage high levels of executive pay,” she said.

“On the other hand, non-financial measures that are transparent, quantitative, and consequently verifiable, as well as those linked to corporate social responsibility, are positively associated with industry-adjusted return on assets.”

The reporting of non-financial targets became even more important in light of the Royal Commission as the Australian Prudential Regulation Authority (APRA) was looking to limit financial targets for banking CEO bonuses to 50%.

This meant there would likely be more non-financial targets in CEO bonus contracts in the future which the researchers suggested needed to be ‘quantifiable, transparent, clearly defined and include measures of corporate social responsibility.’

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