Employment Senior Managers - How can we underwrite or agree on the accountability of actions from the top management employees?

Dear Friends, Our company is run by a board of directors. Under them, different firms and managers are working.
The employment of Senior Positions like, VP, General Managers, etc needs authority for decision making. And in case of wrong decision or loss making decisions, the directors will be penalized either by financial loss or reputation or any other adverse actions. In case of any recovery to made what can be the clause.
How can we underwrite or agree on the accountability of actions from the top management employees? Do we have any such formats, or any guidance in this regards will help.

Dear Ravina Murali,

Your post has surprised me, and shown how anyone's imagination can surpass any level!

Although you have asked for the provisions to penalise senior management professionals like Directors or VPs, you have not mentioned whether yours is a public limited company. If it is a public limited company, then the corporate governance rules apply to you. Every public limited company is required to appoint a Company Secretary, and the Company Secretary is expected to frame the rules of corporate governance.

One way to make the senior management professionals accountable is to assign them Key Result Areas (KRAs). They can be removed from their jobs if they fail to meet the KRAs. This is a common practice across the industries.

However, penalising senior management professionals for their wrong decisions is unheard of. A top-notch IT company in India, once considered an IT bellwether, is struggling to compete. It has changed several CEOs in the past fifteen years. Although several CEOs tried, none could turn it around. Nevertheless, they were given handsome severance packages when they were removed from their jobs. There was no penalty for their failure to turn the company around!

In the MBA courses, a "carrot or stick" theory is taught while teaching the theories of motivation. Possibly, you wish to implement this theory at the higher management level. But which candidate for these positions will accept this type of conditions? This strange condition puts them on par with the workers. So, in the eyes of the ordinary workers, what will be their value, and why will they be respected?

Otherwise, like ordinary employees, the Industrial Standing Orders Act provisions apply to these senior management professionals. Therefore, the company's rights are protected anyway.

My Question to the Board of Directors (BODs): - This brainchild must have come from someone at the board level. So before implementing the "carrot and stick" policy, it is worthwhile for them to come clean and declare what wrong decisions they made in the past, what penalties they paid, to whom they paid, etc. Such open communication will pave the way for their decision!

Anyway, I am bringing to notice this thread to one of the senior members of this forum, Mr Saswata Banerjee. Let us wait for his comments.

Thanks,

Dinesh Divekar

This is a very interesting post.
There is some ambiguity in the post, so I am making assumptions.

1. The company is professionally managed (Board of Directors run the business)
2. There are a number of difference subsidiaries. Probably board has distributed the supervision between themselves.
I am confused as to whether the directors are owners or just employee directors.
How exactly do they suffer financial loss from wrong decisions?
Reputation loss, we understand, but in reality it does not matter. Even someone like Adam Neumann has many companies wanting to have him head their businesses. Investors still are willing to fund his new ventures (though not as many as before)

3. now for VP and GM, they make business decisions and you want to a penalty clause for wrong decisions made by them.

Exactly how will you define a decision to be wrong?
Business is about taking and managing risks.
You need to make decisions with partial information. No one has a crystal ball that will give an accurate prediction for the future. No one expected Covid, so if you decided to set up a new plant just before covid hit and the business makes a massive loss, you want to make the concerned VP bear the cost?

Incidentally, how exactly are you rewarding them for the right decisions?

One way is to have variable pay. The fixed component is payable anyway and the variable component is payable on meeting certain criteria (ensure this is clear and measurable). But variable pay can not be negative. If your variable pay is too high as a ratio of total, you will find it difficult to get good talent. Most candidates will see the fixed pay and ignore the variable as they do not have any guarantee you will pay it.

For directors, you can have a salary and a commission dependent on profit the company makes. There are certain rules on it. Max I believe is 11% for the entire board of directors together. There is also a cap on earnings of boards where the company makes a loss. Only in such cases, amount already paid can be plowed back.

Some American companies have a plowback clause for bonus, but that applies only in case they find a fraud or manipulation in the business, matrix or evaluation criteria, not otherwise. And that too is difficult to enforce.

For those other than directors, I dont think any court will enforce a suit to recover salary paid due to a so called wrong decision, unless it was a deliberate sabotage by the concerned employee, or involvement in fraud or corruption.

I agree with Dinesh-ji...
It is ill thought out and I would also like to know the antecedents of the person who came up with the idea.

Dear Dinesh & Saswata,
I really appreciate your response.
Let me clarify the whole picture.

The company is a private limited and hold a Board of directors. Different departments are headed by one of the board member itself. Mostly project based works are what we are doing.

Secondly the departments have their staffing from top designations to the smallest.

What is seen over the past is that the Directors never shared any project budget figures or no business empowerment was given to the subordinates. They use to work and do multiple activities over the command of the seniors. Lately I saw there was no control over the cash inflow and out flow. I also identified that they are not aware of the project expenses and happenings. And because they were not told about. Given the responsibility but not given the measures to financially track.

Now i have suggested the board to empower the Project heads or the department head to be accountable for the profit and loss of the activities they do. I believe like this " When i say I have only 100rs and work needs to be completed within this amount. Then they will have some framework or action plan to execute work accordingly. Without sharing the project costing we cannot demand quality production".

In this context the board is asking me - how will you make the Department head accountable. What if they don't adhere to some safety milestones or they take some wrong decisions, may be misuse of company name, fraud activity, may be any legal compliance issues arises... etc and directors are the legally responsible for all the negative impacts.

I am in the same point without telling the project values - how will they know if their work contributes to the profitable journey or the project is dragging to loss.

KRA's will clear the gaps - you achieve this or not you are responsible - accordingly Performance appraisal can be made or any other actions can be taken.

On other other side, i understand that the board is asking for some kind of a surety. but no one will join firms with such document in place.

Can we add a variable pay for the Senior employees - of so any specific conditions or percentage to follow.

I suggested to have a NDA - Non-disclosure agreement for share the basic budget details - still the board seems to be not completely happy with that.

As i have not recruited any of the top management employees like CEO, VP's etc, your guidance will help me understand - how are their offer terms will look like? Any related points come in their interview discussions. How does at that level the performance delivery discussions happen.?

Thanks for the patience in reading and guiding me to light.

The picture is clear now, essentially you are lkking for some sort of performance guarantee of your next to the board level appointees which has both a positive and negative outcomes based on the results achieved. I would recommend you to adopt a Balanced Score Card (BSC) approach which is a comprehensive measure. Work out BSC for allsuch key position occupants and perioodically review (I would suggest quarterly if monthly monitoring is not feasible). You can work out the para,meters for each level of performance based on the past data and link your incentive with the ultimate credit score. Initially start at the top level and gradually work downwards to cover all the executive positions.