Australasian Compliance Institute Calls for Tighter Control of Executive Bonuses via KPIs Linked to Corporate Governance

 
SYDNEY, Aust. May 27, 2009 – The Australasian Compliance Institute (ACI) has called for tighter control of executive bonus payments via the introduction of Key Performance Indicators (KPIs) directly linked to industry-benchmarked governance frameworks.

In a submission to the Productivity Commission as part of the Public Inquiry into the Regulation of Director and Executive Remuneration, which commenced in March 2009, the ACI said new KPIs should be used to determine bonus payments for directors and executives. The KPIs would focus upon the governance of the organisation, with an emphasis on compliance and risk management. Bonus payments would not be paid to directors and executives if the organisation did not operate within its agreed compliance and risk parameters.

 “A growing area of community concern has been the perceived disconnect between the financial goals of individuals that run organisations, shareholders and customers,” said Martin Tolar, CEO, ACI. “Of particular note is the breakdown in the relationship between bonus payments, despite corporate failures that take the form of either financial loss, fraud, regulatory breach or excessive risk taking outside of normal business parameters.”

“We believe that the balance between performance payments and community expectations can be achieved through stringent KPIs that focus on the corporate governance. These cannot focus on minimising breaches as the determining factor, as this could create a culture where not all breaches are reported, in a bid to secure bonus payments.”  

The ACI also recommended that recognised performance standards be mandated as a benchmarking tool, to allow organisations to ensure their compliance and risk frameworks meet industry best practice. These standards would support existing regulatory frameworks.

The performance standards, Australia/New Zealand Standard AS/NZS 3806, and Australian/New Zealand Risk Standard AS/NZS 4360, allow organisations to benchmark their compliance and risk frameworks. Both standards are seeking internationally recognised ISO (International Organization for Standardization) status – AS/NZS 4360 is in the final stages of gaining ISO status and the ACI has commenced work to have AS/NZS 3806 adopted.

“The AS/NZS 3806 comprises 12 principles grouped into the themes of commitment; implementation; monitoring and measurement. These principles relate specifically to the ‘tone at the top’ established by an organisation’s key decision makers. It is these principles that should be built into the performance measures of executives,” Mr Tolar said.

“The adoption of these standards by organisations not only allows them to create a sound risk management and compliance framework, it also sets out the basic performance criteria on which the senior management, management and employees can have their performance assessed. With KPIs drawn from these standards, the organisation will create a culture of compliance and good governance directly linked to performance payments.”

The final Productivity Commission report will be presented to government on December 19, 2009.