New measurements needed for bonuses?

It was hardly a surprise to hear that James Murdoch decided to turn down the $US6 million bonus he was set to receive from News Corp based on his performance in the last year.

After being embroiled in one of the biggest corporate scandals of the last decade, taking a bonus of this size would have seemed more than a little distasteful.

“In light of the current controversy surrounding News of the World, I have declined the bonus that the company chose to award to me,” Murdoch said in a statement Friday.

“While the financial and operating performance metrics on which the bonus decision was based are not associated with this matter, I feel that declining the bonus is the right thing to do.”

Murdoch deserves kudos for his call, however obvious a decision it might have been. (That said, Rupert Murdoch’s pay increased 43% to $US33 million and there is no sign yet he’ll be giving any of that back.)

But the fact that Murdoch was to have been paid a bonus at all would stick in the craw of many, and does raise an interesting question about the way remuneration packages and particularly bonus schemes are built.

Put simply, should bonus schemes consider things other than the “financial and operational” metrics of the business? What role should corporate and social responsibility play in bonus payments?

The difficulties of linking pay to social measures are numerous and well known.

For an interesting discussion of this, go here, but to summarise:

• Social metrics can be difficult to actually measure in ways that finances are not.
• The perceived benefits of a social metric may also differ according to the point of view of stakeholders – for example, closing a factory with environmental problems would appeal to green groups, but would not impress the unions whose members lose their jobs.
• There is definitive proof that a manager who can deliver social “performance” will be rewarded for doing so by the market in terms of a higher share price.

All of which I can understand. But perhaps the solution is to give remuneration committees (which under ASX guidelines should include mostly independent, non-executive directors) the discretion to step in and take away a bonus payment in circumstances like that News Corporation has found itself in this year.

I know that idea is problematic, not least because executives may be loath to sign contracts that put their bonuses at risk of being taken from them for reasons they might not have complete control over.

But we need to start a conversation about how pay structures take scandals into account.

Because not all executives of controversy-plagued companies are going to do the right thing like James Murdoch.