Friday, July 9, 2010

Nuclear Management Compensation (Part 2)

In Part 1 we provided the results of our survey of nuclear executive compensation levels, structure and performance metrics.  In this post we try to ascertain what impact, if any, these factors could have on nuclear safety culture and safety management.

To us there were several fairly striking observations from the data.  One, the amounts of compensation are very significant for the top nuclear executives.  Two, the compensation is heavily dependent on each year’s performance.  And three, business performance measured by EPS is the key to compensation, safety performance is a minor contributor.  A corollary to the third point might be that in no cases that we could identify was safety performance a condition precedent or qualification for earning the business-based incentives.

Some specifics.  Generally the compensation programs state that they are designed, in part, to reward safety and other stewardship goals.  Sometimes the term “operational excellence” is used and can include “safety” but it is difficult to know what this encompasses as SEC filings include various levels of specificity.   In other cases the term “culture” is used but in general the context is not nuclear safety culture.*   Some incentive plans state they are designed to prevent “promoting excessive risk” or unnecessary risks.  These plans did not discuss any specific penalties or reductions in incentive linked to risk so it is difficult to judge how they are intended to accomplish the goal.  It may be that using company stock for significant parts of the incentive payout is intended to ensure that executives have an interest in protecting their ownership stake.  By far the most common metric in the incentive programs associated with safety is industrial safety accident rate and/or fatalities.  This is understandable in that across the enterprise of a power generation company, industrial safety is a common goal and can be measured on a common basis.  Generally, fatal accidents result in a safety penalty in the incentive program, and the penalties could reduce the total incentive by about 5-10%.  The largest safety impact on incentive that I came across was a 10% factor for OSHA safety and 10% for nuclear safety culture.

One caveat is that the incentives and executives described in SEC filings necessarily represent the very top level of the enterprise.  The specifics of incentive programs for lower tier executives, including those within the nuclear operating organization, are not available.  However, it seems a safe assumption that the design of the incentive program is carried down the organization to at least the VP level, including significant performance incentives, but with metrics weighted more to business unit performance. 

What is the significance of these compensation programs to nuclear safety management, if any?  First, with regard to total compensation, the high levels recently achieved could be viewed as a positive in assuring that the highest quality management is attracted and retained in nuclear operations.  The responsibilities of nuclear executives are unusually large, complex and unremitting.  While the totals are eye-popping, viewed in the context of the compensation for other executives in the enterprise, there is only parity. 

With regard to the structure of compensation - the amounts that are based on performance and the metrics used to define goals - there may cause for greater concern.  As shown in Part 1, with 60-70% of total compensation at risk, executives can see their compensation, and that of the entire management team, impacted by as much as several million dollars in a year.  And almost all of that incentive is based on business goals such as EPS, cash flow, budgets, and plant performance.

As we have commented many times in this blog, we view achievement of nuclear safety culture as a process of successfully balancing safety goals with other competing business priorities.  That context is unavoidable.  Simplistic statements that “safety is our highest priority” do not reflect the reality of day-to-day decision making, or insulate decision makers.  The balance is complicated and difficult since decisions are rarely black and white.  And we have seen time and again, bad outcomes can evolve from a series of decisions and judgments that tilt the wrong way, apparent only in retrospective.  When executive incentive programs weight business goals 90% and some aspect of safety 10%, what is the message?  How does it not amplify the pressure on the executives and possibly skew the balancing act?  How does it “prevent promoting excessive risk” as some compensation plans state? 

In Part 3 we will discuss whether executive compensation should be an element of nuclear safety culture and what might be done to ensure that it reinforces the commitment to safety.

*  In one case “People, Culture, Reputation” as a goal is expanded to mean: employee performance appraisals, executive-level employee diversity, ethics and compliance training, corporate values, and regulatory compliance.  It counts for 10% of the total incentive.

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