If a company wants to change its culture to one where positive risk management is at its very core, then analysing and making improvements to the various strands from which the culture of a company is made up can provide a valuable way to effect this change.
Five key questions on using reward as the driver for change
One of the key tools in changing the culture of a company and focusing its employees on risk management and accountable behaviour is to target its remuneration structure – and the underlying performance-management system that may impact on remuneration.
So what changes can a company make to its reward and appraisal systems, to effect the all-important change in culture? Here are five key questions to consider:
1. Is the remuneration of your senior executives aligned with the behaviours and performance the board wants to set for the company as a whole?
Remuneration committees should have a clear understanding of the strategic direction of the company and should consider what financial and non-financial targets are appropriate for the company’s most senior executives, in line with the desired culture. It may also be appropriate for the remuneration committee to play a role in setting the principles that will apply to remuneration on a company-wide basis.
2. Does your appraisal system help or hinder you?
Consider whether the appraisal process should incorporate a review of employees’ awareness of relevant risk-management policies, their completion of appropriate training and their success in any tests arising from such training. At a more senior level, could the appraisal system target specific behaviour (eg encouraging the employee to lead by example and monitor compliance by their team, or to produce reports addressing further actions that the company could take)?
3. Is remuneration influenced by 'good' behaviours?
Either through building it into appraisal systems, or by using it as a standalone factor in the assessment of bonuses or incentive awards, think about how your reward system can be linked to risk-awareness. Good risk management could be built into a bonus scheme’s rules as an express factor influencing bonus levels. Alternatively, remuneration committees could be invited to consider these factors when exercising any discretion as to the level of awards.
4. What about clawback?
Clawback of amounts which have already vested or been paid to employees can be problematic, from a legal and practical perspective. However, companies are increasingly looking at introducing clawback provisions into their incentive schemes. Certainly, clawback in the event of serious breach by the employee is one area to which companies may wish to give serious consideration.
5. Are employees aware of the factors that influence remuneration?
Reward will only be a useful tool in shaping behaviour if employees are aware of the factors that influence it. Employers can raise awareness through the intranet, in emails to employees, in discussions between employees and their managers and in bonus scheme documentation. Statements do not need to be specific, or to create any inappropriate expectations, but employees need to know that their attitude to risk could impact on reward (both positively and negatively).
Changing any employment terms or conditions will involve legal considerations – from contractual changes to obligations to consult the workforce. However, if proactive steps are taken to assess the legal risks and practicalities of effecting change, then reward can successfully be used as a key driver to cultural change.
Caroline Stroud (pictured) is a partner and Holly Insley an associate in law firm Freshfields Bruckhaus Deringer’s employment, pensions and benefits team
