‘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.
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.’
AUTHOR
Laura Dew
Recommended for you
Australian fund managers are actively seeking to launch Cayman versions of their funds to attract offshore flows, with Regal Partners set to launch its latest offering this month.
As private markets gain traction in Australia but only a limited pool of talent is available, three recruiters explore whether fund managers should consider looking overseas to find top talent.
With an explosion of private credit managers appearing in the market, two alternatives experts believe a consolidation is needed to maintain the quality of the sector.
Bentham Asset Management has become the latest fund manager to expand its distribution team as it reports increased interest in its credit strategies.
