Mismanaging pay and performance

Understanding the relationship between performance measurement and desired behaviours is an important element of a company’s talent ...

Understanding the relationship between performance measurement and desired behaviours is an important element of a company’s talent management. Rupert Merson believes it is equally important to know what doesn’t work.


Rethinking remuneration

Remuneration continues to be an intractable problem for those responsible for governance frameworks inside and outside organisations. These individuals should at least:

  • Appreciate the complex nature of the problem they are dealing with
  • Recognise and protect their companies and their stakeholders from the consequences of an over-powerful director and her influence on her own remuneration
  • Recognise how reward for achievement is different from incentive for performance not yet delivered, and
  • Appreciate how, at a level that differs from individual to individual, incentive turns into greed, something that is quite different and in nobody’s interests

Establishing the right remuneration levels in a small business brings challenges all its own. The first finance director in a business, the recruitment of whom marks a key stage in the evolution of governance in a growing business, can seem particularly expensive. He is quite likely to be the highest-paid employee in a young business — but as one venture capitalist put it: “I always tell companies we’re looking to invest in that a quality finance director will more than pay for himself within a year.” It is not just the fact that accountants are expensive that accounts for the differential salary. More than money motivates a founding entrepreneur, but any senior manager recruited to an established business has motivations inherently different from those of the founder. Money will almost inevitably mean more. Many businesses without a decent finance director will argue that they cannot afford one and will leave the recruitment of a finance director until it’s too late — when the control of the most important governance element in the business is in the hands of someone who is unqualified and unable to add serious value.

Not surprisingly, many founders of new businesses look for ways of structuring a remuneration package that allows the business to keep the cake while giving the candidate the illusion of eating it. Giving directors options, or equity, is often seen as a route to making them very rich if they happen to work for major listed companies. In smaller businesses, as noted before, it is more likely to be an excuse for not paying them properly in the first place.

It can be easily forgotten that performance management is not just a matter of remuneration. Appraisal, assessment, training and development should be key components of any governance framework, as should forms of non-financial recognition such as title, promotion, status and authority.

Appraisal, training and development are not just matters for the appointments committee. In a rapidly changing world they are live issues. The costs of not taking them seriously far outweigh the time and financial costs required to invest in them properly. Professional institutes and organisations acknowledge this and oblige their members to comply with continuing professional development. The day may come when the profession of management will benefit by establishing similar requirements.

“Mismanaging pay and performance” by Rupert Merson can be read in its entirety in the Summer 2010 issue of Business Strategy Review. Rupert Merson’s new book is Rules Are Not Enough: The Art of Governance in the Real World (Profile Business, 2010).

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