Executive bonuses are not intrinsically wrong, but they must reward performance that's sustainable.

Author:Glass, George
Position:In business

I start my presidency at a time when the outlook for business mirrors what millions of people who watched this year's World Cup must have been feeling: a mix of optimism and uncertainty. Now that the dust from the global downturn (and the football marathon) has started to settle, it's time to consider how to create business structures that are stronger, more transparent and, above all, sustainable.

It is heartening to see that sustainability is being embedded at all levels. For instance, in June the Financial Reporting Council (FRC) published its UK corporate governance code with a clear focus on long-term development. In fact, its opening sentence states: "The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company."

From a management accounting perspective, CIMA is working hard to promote the value that its members can bring in helping businesses to develop sustainable strategies. One of the key issues discussed in the FRC's code is that of executive remuneration. Some pundits are calling for an end to boardroom bonuses and the potentially ruinous preoccupation with short-term success that they engender. But CIMA believes that doing away with them altogether would be throwing the baby out with the bath water.

In our new report, "Executive remuneration schemes and their alignment with business stability" (www.cimaglobal.com/executivepay), we look at how bonuses could be repositioned so that high-flyers are rewarded for diligence rather than self-interest. Our first recommendation is that incentive schemes should be designed so that they are both proportionate to achievement and linked to performance and risk. Our second is that companies should ensure that their annual reporting process illustrates these incentives effectively. Once these two planks are in place, the whole approach to business strategy starts taking a new form.

A balance must be found between the fixed and variable elements of any bonus plan. The fixed elements would need to be attractive enough to draw in the best candidate in the first instance--even if the...

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