Starting situation – the intractable problem of creating incentives in a company
Because of the particular interest it holds for the public, the issue of remuneration for top managers needs to be handled extremely sensitively. This applies to both the technical system parameters – the bonuses need to be in a suitable and proportional relationship to the company’s performance – and to internal and external communications. In the project in question at an international bank, despite a series of minimally invasive interventions, the company had not managed to resolve disagreements on remuneration between the Board of Management and shareholders. Although the size of the bonuses depended on a wide range of factors, it did not adequately reflect the company’s actual value enhancement, which is, of course, the main concern of shareholders. Selecting value-based performance variables was therefore a key challenge; another was to detach target setting from the planning process and the agreement on medium-term goals, since budget talks had frequently taken on the character of salary negotiations.
Project approach – harmonizing interests – implementation using back testing and stress testing
As part of the project, the variable remuneration components were realigned in a four-step process: 1) Calculation of bonuses according to the annual value added – 2) Setting of medium-term goals and separation of goal setting from the planning system – 3) Introduction of a bonus bank to involve management in sustainable development – 4) Additional incentives to encourage the actual implementation of value-enhancing decisions. During the project rounds, the board members had already arrived at the long-term, strategic perspective which is the precise aim of a value-based remuneration system. This triggered key discussions, almost as a by-product of the project. After the design phase, the envisaged system was analyzed based on both random scenarios (stress testing) and historic data (back testing). This enabled the economic relationship between expected remuneration and achieved corporate value to be quantified, while incorporating upper and lower thresholds, and achieving optimum calibration of the remuneration intervals with expected fluctuations in performance.
Finding – a common goal unites people
Using value-based key data, shareholder goals can easily be translated into concrete management incentives. This serves to resolve conflicts of interest and eliminate the plurality of goals that often prevails, thus ensuring that the correct long-term priorities are set. In this context, an independent third party can intervene to provide support, not only in the role of architect, but also as a mediator and facilitator for internal and external communications.
- Performance-based remuneration aligned with added value.
- Simulation of the remuneration model for different business scenarios.
- Support with communicating and implementing the concept.