They should not be based solely on financial performance
When it comes to Key Performance Indicators (KPIs) for executives, organisations are increasingly shifting their focus from issues relating to the creation and use of financial capital to other, sometimes softer, measures of value addition. This is according to the most recent HR Quaterly report from PwC, which states that the introduction of the King IV corporate governance principles have broadened the idea of performance measures to include an organisation’s impact on the economy, society and environment.
The choice of performance indicators requires introspection at board level and is invariably dependent on the type of industry that a company operates within. Non-financial measures could include safety, environment, employee responsibility and the organisation’s carbon footprint.
An organisation must, therefore, identify its value drivers and how value creation takes place over the short, medium and long term. These value drivers will be used to develop the performance measures or targets, which will be included in the design of the incentive scheme for the relevant executives.
In the UK, there has been criticism of the use of traditional (financial) performance conditions, which do not drive the correct behaviours and leads to excessive remuneration – PwC HR Quarterly 3rd Edition September 2017
Financial metrics should, therefore, be viewed as financial indicators supporting the sustainability. The identification of suitable metrics to apply to executive remuneration is critical should be dependent on value drivers that are incorporated into the organisation’s strategy and cascaded to the business units, the departments and individual targets of the executives, to ensure that their activities are aligned with the overall organisational strategy.