Financial Goals and Managerial Compensation in Business: AIB Report

This report delves into the critical conflict between financial and non-financial goals within a business context, highlighting the challenges that arise when these objectives are not properly aligned. It examines how managerial compensation structures, often tied to financial metrics, can inadvertently incentivize actions that undermine customer service, ethical conduct, and long-term sustainability. The report discusses the potential for misconduct and non-compliance when non-financial goals are neglected and emphasizes the importance of incorporating non-financial metrics, such as customer satisfaction and environmental impact, into compensation plans to promote a more balanced approach. It references the views of institutional investors, and the need for firms to convince shareholders of the importance of non-financial metrics in addition to financial metrics to promote a more balanced approach. The report concludes that a holistic approach, considering both financial and non-financial factors, is essential for sustained success and ethical business practices, advocating for a balanced approach to managerial compensation that considers both financial and non-financial metrics to mitigate risks and promote overall business health and stakeholder value.

Financial managers are responsible for both the financial and non-financial goals. Financial
objectives are to increase the business revenue and profit margin of the firm where as the
non-financial objectives are to provide high quality customer service, to perform CSR
activities and to follow all the rules and regulations. The motives for these goals can be
maximising of the shareholder’s wealth but sometimes the managers can work for their own
interests rather than that of the firm. So, the compensation of the managers is generally
linked with the stock or business performance by adding stock options in the compensation
plans. This kind of compensation can motivate the mangers to increase the profitability of
the firm without considering the impact they can have on other non-finance goals. For
example, in order to increase the revenues the firm can concentrate mainly on the
marketing and sales side but not on the customer support side that can hurt the expectation
of the customers and future growth of the company. These kinds of practices can hurt the
brand reputations as such misconducts do not go well with the customers and regulators in
the long run. Other scenario can be the aggressive use of natural resources to increase
firm’s sale without taking into account the environmental impacts. Also, In order to increase
the overall profitability some firms do not pay attention to the working conditions and
facilities but rather reduce the costs by using unsafe and harsh practises. The management
can be focused on increasing the overall efficiency of its operations by investing in the new
technology and innovation but if the result of this is just a low-cost product with lower
quality then it will hurt customer’s loyalty. The challenge faced in these situations is that it is
difficult to measure the impact on the non-financial goals in terms of concrete number. Also,
another issue is that these issues sometimes do not become clear suddenly but only later
when they can affect the involved stakeholders and the firm in an adverse manner. It is clear
that these issues can create effect on the various factors important for the success of the
firm like customer loyalty, social acceptance and employee satisfaction. It is learnt in the
topic that both financial and non-financial goals are important for the firm. The conflicts
arising between both goals need to be addressed by accounting financial and non-financial
metrics when making companies policies. Also, there can be various ethical and moral
considerations that can arise if these non-financial metrics are not handled properly as
these measures do not exist separately but they are hugely important. The misconducts
arising from the lack of focus on the customer service and non-compliance with the general
principles can hurt the business. According to Bartholomeusz (2019), the remuneration plan

of the management should not only focus on financial metrics but also non-financial
metrics. This may lead to managers giving equal importance to key non-financial measures
like customer satisfaction, environment and sustainability and working conditions. But the
major institutional investors do not want managers to deviate from the end goal of
increasing their wealth. They do not want to give more discretion to the board in setting the
management compensation as these non-financial metrics are difficult to measure. The
firms need to convince their shareholders and other stakeholders to use some financial
metrics in addition to the total share return and non-financial metrics in the composition
plan. This will discourage the management from focusing on financial performance at the
expense of customer outcomes. Also, this will reduce management misconduct and other
compliance issues that can occur if such issues are neglected.