It is a legal requirement for medium-sized companies to publish analysis of their performance against key performance indicators (KPIs), and for large companies to also consider non-financial metrics. Despite this, it is very common for companies to be surprised that they need to include them, or to just throw in the bare minimum as they don't regularly assess their performance against KPIs.
So why do I think this is important? The example quoted below from a water company clearly shows what can happen when there is a mismatch between the metrics used to assess performance and what stakeholders consider important. Should bonuses have been paid? If the individuals concerned have met their performance targets then absolutely they should - but to save the company a PR disaster, it might have been better to put more thought into what those targets should measure.
Turnover is often a go-to KPI for businesses that haven't put much thought into their assessment. Its (usually) straightforward to measure, and sales show growth, right?
Not necessarily. Most businesses will (sensibly) align bonuses with their KPIs - and management incentivised by sales can focus too much on the top line, without considering whether a given sale is actually good for the business. Consider, for example, a £10m contract at 1% margin. Sure, it will look great on the top line - but is the £100k of gross profit generated actually going to offset the administrative overhead of servicing the contract, or the lost opportunity of other contracts; potentially smaller but more profitable.
At the most extreme end, it can directly lead to fraudulent behaviour - just in the past week, I've seen a market announcement for a company needing to halve its reported revenue following a review.
So should we use profit rather than turnover? While more directly linked to shareholder value, it is highly susceptible to accounting adjustments and so does, unfortunately, increase the likelihood of fraud if directly linked to management bonuses. Additionally, in an age of ESG and responsible business, it doesn't distinguish the quality of the profit: £100k from rainforest stripping trumps £90k from green technologies.
The better answer - as with so many things - is not so straightforward. Businesses need to define their own KPIs based on their own business models, and considering the needs of their stakeholders. Clearly long term profitability and growth are important elements to include, but wider considerations are also key - nobody wants to be the company accused of paying bonuses to pump sewage into the river!
Wessex Water paid £200,000 to four bosses tasked with protecting and enhancing the environment despite foul water discharges into rivers. Sewerage overflow is causing bacteria in our water which is potentially harmful for wildlife and swimmers. Water campaigner Feargal Sharkey called the bonusses "unjustified". Wessex Water defended paying the bonuses for 2021-2022 and recent £63.5m dividends to shareholders as they say they have exceeded their targets.