Issue Overview
Executive compensation in large enterprises is a controversial matter mainly because high levels of pay received by CEOs are not always in line with shareholders’ interests. As the example of the Big Four Banks in Australia has demonstrated, their leaders were generously compensated regardless of engaging in multiple unethical and illegal activities and pursuing personal financial interests instead of the interests of their companies (CFA Societies Australia, 2018). Executives’ unethical conduct had eventually resulted in significant reputational damage to the banks and a substantial decline in their market value (Duran & Barrett, 2018). From this evidence alone, it may be concluded that executive compensation strategies used in those Australian banks were rather ineffective.
Stock options as a form of non-cash executive compensation have prevailed in many banks across the world, including the Australian ones. As noted by Cerasi, Deininger, Gambacorta, and Oliviero (2017), nearly 40% of all banks awarded stock options to their executives during the post-crisis period. Nevertheless, this remuneration structure is not as advantageous as it may seem at first. Indeed, the granting of the right to CEOs to purchase company shares at a pre-determined price in the future can motivate them to generate wealth for shareholders since they themselves can gain substantial financial benefits if stock price rises (Nesvisky, 2019). However, as validly stated by Karpavicius and Canil (2017), this type of financial contract is not obligatory, which means that CEOs awarded with stock options do not lose anything in case their enterprise’s stock price drops. Therefore, other shareholders are the ones to bear all unfavorable outcomes when something goes wrong in their company’s leadership and the company’s market value declines.
HR Strategy
The review of the stock option issues reveals that a more effective approach to executive remuneration is needed. Firstly, executive compensation in the Australian banks was not tied to performance outcomes, and, secondly, the major problem in the CEOs’ conduct was related to the field of ethics (Applied CG, 2018). Thus, it is important to link executive compensation in those banks to both desired strategic/organizational performance measures and socially responsible/ethical behavior outcomes. As noted by Hong, Li, and Minor (2016), such an approach to remuneration can motivate managers to act in a way that benefits shareholders much better than the regular systems of pay.
When designing the remuneration structure, the HR team can follow the recommendations provided in the recent Royal Commission report. In a nutshell, the document suggests that “remuneration programs [must be] designed to encourage the sound management of non-financial risks and reduce the risk of misconduct” (Nice & Travers, 2019, para. 2). To achieve this, the banks should shift from using merely financial indicators when developing executive compensation systems. Alternative metrics that HR can employ to base the executive rewards upon are customer and employee engagement (Nice & Travers, 2019). However, each enterprise needs to conduct a comprehensive analysis to determine which outcomes it wants to achieve and what specific factors may help it to increase organizational value.
In the case of the Australian banks at issue, it may be recommended for their HR to tie executive remuneration to all matters relevant to corporate reputation management. According to Vig, Dumičić, and Klopotan (2017), reputation is one of the core intangible assets of companies and is positively correlated with both the financial performance and market value of enterprises. Clearly, the best way to minimize reputational risks is through the adoption of ethical leadership behaviors. Thus, as part of compensation planning, HR should create a thorough list of ethical responsibilities and duties, which executives will be obliged to comply with to receive their pay and benefits.
Executive Succession Plans
Issue Overview
The term “bad apple” is normally used to describe a person who often engages in various forms of misconduct. Even though in some situations it is appropriate to blame a particular individual for wrongdoing and abuse of power, “there is some risk that an over-emphasis on bad apples may distract from collective norms or other environmental factors that influence conduct (Financial Stability Board, 2018, p. 32). The overall organizational culture, the quality of internal control methods, and the effectiveness of corporate governance practices are among the major drivers of either positive or negative employee behaviors (Hamilton, 2017; Financial Stability Board, 2018). Therefore, to prevent ethical violations on part of leaders and managers, companies must primarily focus on the enhancement of these three internal factors.
Noteworthily, in the situation when a CEO is caught acting illegally or unethically and affected the enterprise’s identity and value negatively, it is essential for the board to undertake the right measures to hire a more competent and responsible candidate and prevent similar adverse cases from happening ever again in the future. Effective succession planning is crucial in this regard and is considered to be a major prerequisite for equipping a company with strong leadership (Price, 2018; Sanger, 2018). According to Timms (2016), well-designed succession plans not only define desired core competencies of a leader but also indicate measures for the assessment of his or her performance, professional development, and possible future replacement. In this way, a good succession plan captures all stages in the cycle of a leader’s service from the very start to resignation and, moreover, outlines major accountability measures that facilitate the board’s control over leadership.
HR Strategy
Considering that the major HR duty is the management of the organizational workforce in a way that helps the company to meet its vital needs and strategic interests, HR teams can substantially contribute to the development of executive succession plans. According to SHRM’s Guide to Succession Planning and Leadership Development, the succession management process comprises three basic steps: preparation, planning, and development (Day, n.d.). The first one refers to the understanding of the organizational context and requires clarifying the roles and functions of experts involved in the planning process and taking into account transparency issues, plan scopes, and so forth (Day, n.d.). The consequent planning phase focuses on activities aimed to obtain support from the top management, identify talents, and detail various components of the succession plan (Day, n.d.). Lastly, the development stage has a goal to prepare and develop talent and includes various HR and leadership practices aimed to assess employees and support their growth (Day, n.d.). While the preparatory phase is undeniably important, the last two steps reflect the very essence of succession planning.
It is valid to say that the identification of qualities of an ideal leader is the first most essential step in the creation of the CEO succession plan. Nevertheless, a thorough analysis of the existing talent pool is equally important (Cassidy, 2018). According to Welsh (2019), “reviewing talent should be as regular a part of [a] company’s processes as reviewing … financials” (para. 4). By the very nature of their profession, HR professionals may perform this function much better than other professionals in the enterprise as they have the necessary knowledge of tools needed to monitor the workforce, locate the right candidates, and motivate them to meet the set organizational standards of excellence. By tapping into this expertise, the main goal of HR in the Big Four Banks will be to find and develop leaders who not only possess remarkable managerial skills but also show ethical integrity.
References
Applied CG. (2018). Australian banking scandal. Applied Corporate Governance. Web.
Cassidy, F. (2018). How to create your CEO succession plan. Raconteur. Web.
Cerasi, V., Deininger, S. M., Gambacorta, L. G., & Oliviero, T. (2017). How post-crisis regulation has affected bank CEO compensation. BIS Working Papers, 630, 1-44.
CFA Societies Australia. (2018). The Royal Commission into misconduct in the banking, superannuation and financial services industry. CFA Institute. Web.
Day, D. V. (n.d.). Developing leadership talent: A guide to succession planning and leadership development. Web.
Duran, P., & Barrett, J. (2018). Investors revolt against executive pay plans at tarnished Australian banks. Reuters. Web.
Financial Stability Board. (2018). Strengthening governance frameworks to mitigate misconduct risk: A toolkit for firms and supervisors. Web.
Hamilton, G. (2017). Contributing factors to ethical violations: What makes otherwise ethical project managers make poor decisions. ProjectManagement.com. Web.
Hong, B., Li, Z. F., & Minor, D. (2016). Corporate governance and executive compensation for corporate social responsibility. Journal of Business Ethics, 136(1), 199-213.
Karpavicius, S., & Canil, J. (2017). Paying CEOs with stock options doesn’t drive their business strategy: Research. The Conversation. Web.
Nesvisky, M. (2019). The trouble with stock options. National Bureau of Economic Research. Web.
Nice, T., & Travers, B. (2019). Remuneration in financial services: Reducing misconduct and repairing trust. KPMG. Web.
Price, N. J. (2018). Executive CEO succession planning for corporate boards. Diligent Insights. Web.
Sanger, M. (2018). HR’s biggest challenge: Succession planning. Hogan. Web.
Timms, M. (2016). Succession planning that works: The critical path of leadership development. Victoria, Canada: Friesen Press.
Vig, S., Dumičić, K., & Klopotan, I. (2017). The impact of reputation on corporate financial performance: Median regression approach. Business Systems Research, 8(2), 40-58.
Welsh, J. (2019). 7 steps to successful succession planning. Forbes. Web.