<div>Well, isn’t this case a typical challenge for all company Boards. Over the past decade, most organisations have tried to adopt a stronger focus on bonus and performance pay, at times led by some ill-founded beliefs. This cannot be a panacea for improving performance, unless supported by an overall organisational culture.<br /><br />Research says that successful organisations have a fit between their culture, strategy, organisational routines and their people. There is a principle of ‘complementarity’ that exists, that is, doing more of one practice increases the returns of doing more of another practice. Therefore, complementary practices increase the salience of the total system. You can’t take the concept of high performance bonuses from, say, the financial sector, and apply it to another industry without the supporting culture, organisational routines, etc. That’s why I believe that mindless ‘benchmarking’, without looking at the total fit in the system, is a waste of time! An overemphasis on financial rewards or bonuses would need a concomitant target-setting process that is robust, strong audit checks and balances, while possibly at the same time consciously trading-off an element of trust in the organisation culture.<br /><br />Having said that, let’s look at the issue of ‘what measures’? Here I would like to broach three concepts. We always tend to reward measures that are easily measurable, even though as an organisation, we would equally require some other behaviours. For instance, while current revenues and its growth are important, firms would also like to incentivise innovation and new product development. In such cases, if we do not reward them equally, we would only tend to get the behaviours that are incentivised. <br /><br />And that brings us to the concept of the Balanced Scorecard, which ideally recognises that a business is a result of various trade-offs, and proposes the need to look at a balanced set of measures across key stakeholder groups. More often, the best measures for a strong performance bonus scheme tend to be ‘marked to market’ measures, like market share or total shareholder return. These are normally difficult to be ‘gamed’ and can’t be easily sandbagged.<br /><br />Lastly, it’s also a good practice to have some long-term earnings linked to some measure of sustainable profitable growth, measured over a 3-4 year period, at least for the very top leadership, as it helps keep them grounded in the long term rather than being overly focussed on meeting the current-year numbers.<br /><br />No system is fool-proof. Every bonus scheme needs to be refreshed every few years to align it with the changing focus in the business. Moreover, it is also a good practice to prevent gaming by operating managers — it is but natural for smart people to exploit the system over a period of time. Having a bonus scheme doesn’t mean that the Board should neglect its governance responsibility. In fact, it should strengthen its governance around the key performance elements.<br /><br />In the end, it all boils down to leadership and the culture in the company. Efren shows all signs of creeping rot. As they say, the ‘tone at the top’ is critical as it sends tacit messages down the line. Athreya and Co. have to take a clear stand and use this as an opportunity to send a message all across, and clean up the system.<br /><br />But there is one final point in this case that is quite an interesting conundrum. Should Sanjiv Misra, the CFO, be rewarded for business performance? Isn’t he supposed to ensure the governance in the system? <br /><br />My belief is that governance is just one of the roles a CFO plays; he is also a strong partner in the growth of the business, and he needs to be aligned to it. Therefore, I believe he should have similar business targets as the operating leaders. But we need to ensure that those are well thought out targets, with appropriate governance mechanisms. <br /><br /><em>The author is executive director, HR, Bharti Airtel. He was previously with HUL and Unilever for over 20 years</em><br /><br />(This story was published in BW | Businessworld Issue Dated 03-06-2013)</div>
