PBSs should be ‘road tested’ on the last complete business cycle
When you think you have a good scheme test it on the results of the last full business cycle, the period between the last two recessions. View the extent of the bonus on the net profit.
You need to appraise the PBS as you would a major investment in a fixed asset where you have committed a future stream of income to pay for an asset. See Exhibit 5 for an example of this road test.
Exhibit 5 for an example of this road test
A checklist to ensure you lay down these foundations stones carefully
| Checklist | Is it covered? |
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| All fixed in advance, annual targets for bonuses are removed |
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| Relative measures are introduced to take account of: | |
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| Progress against the relative measures are reported 3 or 4 times a year |
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| Super profit scenarios have been analysed |
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| Historic trends analysed to estimate when super profits are being made |
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| Drivers of super profits identified e.g., the interest margin banks had in 2009 meant that even a fool would have made super profits |
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| Super profits removed from net profit as a % of each $m made rather than have a ceiling |
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| Model tested against last ten, twenty years retained profit/losses to ensure formula is right |
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| Eliminate all short term accounting adjustments including: | |
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| All departments which has a specific profit sharing scheme should have a ‘cost of capital’, which takes into account the full risks involved. |
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| Test the new system on previous years |
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| HR to discuss the change on a one to one basis with all managers affected |
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| Prepare an example of the new scheme and publish in a secure area of the HR team’s intranet section |
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| Removed all bonuses that are linked to share prices |
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| Removed all share options from remuneration |
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| Remove all KPIs from bonus schemes |
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| Evaluate progress against the success in the critical success factors |
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| Rework bonuses paid to about five individuals over the last five years to see what would have been paid under the new scheme and compare against actual payments made |
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| Consult with some clever staff and ask them ‘what actions would you undertake if this scheme was running’ |
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| Discuss with your peers in other companies better practices that work – this will help move the industry standard at the same time as avoiding implementing a scheme that failed elsewhere. |
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| Removed all KPIs from performance related pay |
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| Removed all KPIs from Job descriptions |
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| Removed all KPIs from annual performance agreements |
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| Sold changes via the emotional drivers |
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Have prepared presentations that are targeted specifically at:
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Writer’s biography
David Parmenter is an international presenter who is known for his thought provoking and lively sessions, which have led to substantial change in many organisations. David is a leading expert in: the development of winning KPIs, replacing the annual planning process with quarterly rolling planning, quick month-end processes and making reporting a decision based tool.
His work on KPIs has received international recognition through; an award from the International Federation of Accountants, the popularity of his webcasts on www.bettermanagement.com, and the success of his KPI book.
He has speaking engagements as far afield as Auckland, Wellington, Sydney, Melbourne, Brisbane, Adelaide, Canberra, Perth, Darwin, Darussalam, Kuala Lumpur, Singapore, Johannesburg, Jeddah, Tehran, Prague, Rome, Dublin, London, Birmingham, Manchester and Edinburgh.
John Wiley & Sons Inc have recently published two books titled “Winning CFOs: Implementing and Applying Better Practices” and “The leading-edge Manager’s guide to success – strategies and better practices”. His “Key Performance Indicators – developing, implementing and using winning KPIs” is now in its second edition and is a best seller.
David has also worked for Ernst & Young, BP Oil Ltd, Arthur Andersen, and Price Waterhouse. David is a fellow of the Institute of Chartered Accountants in England and Wales.
He has written over 50 articles for the accounting and management journals. He has won two ‘article of merit’ awards from the International Federation of Accountants. (2007 and 2009). His published articles titles include: “Quarterly rolling planning – removing the barriers to success”, “Throw away the annual budget”, “Beware corporate mergers”, “Implementing a Balanced Scorecard in 16 weeks not 16 months”, “Convert your monthly reporting to a management tool”, “Smash through the performance barrier”, “Is your board reporting process out of control?” “Implementing winning Key Performance Indicators”, “Quick month end reporting” “conquest leadership- lessons from Sir Ernest Shackleton” etc.
He can be contacted at parmenter@waymark.co.nz or +64 4 499 0007. He has recently completed a series of white papers which can be purchased from his website www.davidparmenter.com