Online ReporterDr Newton Demba
IN many boardrooms and remuneration committees, the annual profit number continues to dominate conversations about executive bonuses.
For decades, companies have used net profit as the North Star for performance-based pay.
The logic is simple: If the company makes more money, those at the top deserve to share in the success.
But this approach is not only outdated, but it is increasingly dangerous.
The singular pursuit of profit, especially when used as the primary driver of executive bonuses, can distort behaviour, weaken institutions and undermine long-term sustainability.
It is time for a paradigm shift.
Profit is not always real
Let us begin with the illusion of profit itself.
In many companies, the so-called “profit”, which is used to justify executive bonuses, is the result of accounting treatments, not operational strength. Profit can be manipulated or at least “smoothed” through changes in depreciation policies, fair value adjustments, revaluations and provisions.
In times of pressure, management may resort to creative accounting to meet bonus thresholds.
This is especially dangerous when bonuses are contractually guaranteed based on headline numbers.
Such practices lead to short-termism, where executives chase paper profits while eroding the true financial health of the business.
In this environment, sustainability, risk management and long-term value creation take a back seat.
Bonuses should follow strategic KPIs
Executive bonuses should be linked to a balanced scorecard of strategic and operational key performance indicators (KPIs), which reflect the company’s true progress.
These include:
Balance sheet growth: A healthy balance sheet reflects prudent asset management, liquidity and solvency — critical indicators of a company’s ability to withstand shocks and pursue growth.
Capital expenditure execution: Strategic investments into infrastructure, technology and capacity building are what enable future growth. Rewarding executives for delivering projects on time and within budget builds a culture of execution and foresight.
Operational efficiency: Indicators such as cost-to-income ratio, return on capital employed and productivity ratios give a more nuanced view of how efficiently resources are used.
Sustainability and ESG (environmental, social and governance) performance: In the modern economy, a company’s environmental footprint, social impact and governance integrity must form part of performance measurement. A growing number of institutional investors now require demonstrable progress on sustainability targets.
Customer satisfaction and retention: Long-term profitability depends on satisfied, loyal customers and not just cost-cutting or one-off sales boosts. KPIs like net promoter score (NPS) or customer lifetime value offer deeper insight into brand resilience.
Compliance and risk management: Especially in regulated sectors, executives must be incentivised to build a culture of compliance, ethical leadership and sound risk management practices. Bonuses should be withheld where governance lapses, regulatory penalties or reputational damage occurs, regardless of profits.
Short-term profits,
long-term problems
Over-reliance on profit targets can conceal underlying issues.
A company may show profit growth while undermining its asset base through underinvestment; underpaying or overworking employees; ignoring environmental obligations; accumulating unhedged financial risks; and delaying necessary restructuring.
Boards must look beyond the bottom line to assess the quality and sustainability of earnings. Not all profits are equal and some are not sustainable.
Creating a culture of accountability and sustainability
Performance-based pay should foster a culture of accountability, innovation and stewardship. When linked solely to profit, bonuses incentivise executives to focus narrowly on quarterly results, often at the expense of long-term resilience.
Conversely, a diversified set of performance indicators signals to executives that the board values holistic success: people, planet and performance.
Companies that link bonuses to broader KPIs tend to have stronger governance cultures, more loyal stakeholders and more sustainable growth trajectories.
This approach aligns leadership with strategy and not just numbers.
Rethinking remuneration policies
Boards and remuneration committees must revisit their bonus frameworks.
The following reforms are worth considering:
Delink bonus thresholds from purely profit-based triggers
Incorporate both financial and non-financial KPIs
Include qualitative performance assessments
Apply deferral and clawback clauses where necessary
Ensure external benchmarking against peers of similar scale and complexity
Importantly, HR and finance departments must resist the trend of codifying benefits (including bonuses) into fixed contractual entitlements.
Dr Newton Demba is a corporate governance and management consultant, non-executive director and adjunct lecturer in the Faculty of Business Management Sciences and Economics at the University of Zimbabwe. He writes in his personal capacity. For feedback, please contact: [email protected] or +263784166296.
