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.

Nuclear Management Compensation (Part 1)

We have posted previously on the general topic of competing priorities (cost, schedule, political, personal career interest, etc.) being a potential issue for nuclear managers to balance in making safety decisions.  We have also recently posted regarding the possible influence that cost and schedule pressures may have had on BP personnel in the events leading up to the spill and in several prior BP accidents.  Lastly we highlighted some research results that suggest that compensation incentives may have perverse impacts on desired results.  In this post we turn directly to the issue of compensation for executives with corporate responsibilities for nuclear plants and their operations.  In subsequent posts we will discuss the potential implications of compensation on nuclear safety management.

We researched compensation data that was available in SEC filings of public corporations owning nuclear facilities.  As a practical matter this is the only publicly available information on this subject.  In their annual prospectus, corporations disclose data for the top five compensated executives - the CEO and four other “NEOs” (Named Executive Officers).  In some cases the executive who is the Chief Nuclear Officer is an NEO.  In other cases a higher level executive, typically head of the generation business unit or other operating officer, is the NEO with direct, attributable responsibility for the nuclear facilities.  To obtain an overview of compensation practices we looked at CNOs when available and, if not, the responsible NEOs .  We compiled data for compensation levels, the structure of compensation, and the performance metrics being applied by the corporation. 

Total Compensation

For NEOs with direct nuclear responsibilities, total average annual compensation is now $2.5-3 million (the range for our sample was approximately $1.25 to $5 million).  We counted salary, annual bonus, non-equity incentive awards and equity incentive awards.  We did not include changes in retirement benefit accruals (which can be quite large as well) or other miscellaneous fringe benefits. 

In virtually all cases the level of compensation has shown a significant increase in the last 3-4 years.  This may reflect increased competition for nuclear executive talent rippling through the industry and/or the increased business value associated with nuclear generation assets.  The figure below illustrates how compensation has changed over recent years in two nuclear organizations, one operating a single unit and the other a small fleet.

Compensation Structure

We also examined the structure of executive compensation with an emphasis on the amounts of compensation that are fixed on an annual basis (typically salary and benefits) and those amounts that are “at risk”, meaning they are performance-based.  We found that compensation is heavily incentive based where the amount of total compensation that is earned based on performance now averages greater than 70% (the range for our sample was 60% - 80%).  As with total compensation, the percent of compensation at risk has increased significantly in the last 3-4 years.  The next figure shows the trend lines for the same two corporations as in the first figure.

These results are not an accident as the SEC filings for these corporations set out compensation policies that are heavily weighted toward performance.  For the most part incentives are based on the current year performance though for some specific incentives such as stock options, rolling three averages may be used.  The principal objective appears to be to align executive pay with shareholder interests.

Performance Metrics

Typically the compensation structure uses a combination of corporate level performance and business unit performance to determine incentive payouts.  At the highest level of the organization, the CEO, metrics may be exclusively corporate level and almost always focused on earnings per share (EPS).  Lower tier executives generally have a significant portion (60-70%) of their incentive determined by corporate performance (almost always EPS) with the remainder determined by business unit or personal goals.  The metrics for nuclear business units are typically capacity factor and budget based, occasionally using an index of 8-10 metrics.  This performance will generally be associated with about 20% of the total incentive.  The remaining 10% of incentive is usually associated with some type of safety performance.  OSHA industrial safety measures are most common though we identified one corporation that used a “nuclear safety culture” metric.

In Part 2 we will try to ascertain what impact these factors could have on nuclear safety culture and safety management.

Safety, Cost and Bonuses

An article in the June 29, 2010 Wall Street Journal, “As CEO Hayward Remade BP, Safety, Cost Drives Clashed”, fills in some real world examples of the dynamics of conflicting goals within BP and presumably contributing to the current spill disaster.  The presence of compensation incentives may have played a role in how safety vs. cost decisions were being made.  We will be focusing more on this issue in upcoming posts.

Can Safety Culture Be Regulated? (Part 2)

Part 1 of this topic covered the factors important to safety culture and amenable to measurement or assessment, the “known knowns.”   In this Part 2 we’ll review other factors we believe are important to safety culture but cannot be assessed very well, if at all, the “known unknowns” and the potential for factors or relationships important to safety culture that we don’t know about, the “unknown unknowns.”

Known Unknowns

These are factors that are probably important to regulating safety culture but cannot be assessed or cannot be assessed very well.  The hazard they pose is that deficient or declining performance may, over time, damage and degrade a previously adequate safety culture.

Measuring Safety Culture

This is the largest issue facing a regulator.  There is no meter or method that can be applied to an organization to obtain the value of some safety culture metric.  It’s challenging (impossible?) to robustly and validly assess, much less regulate, a variable that cannot be measured.  For a more complete discussion of this issue, please see our June 15, 2010 post. 

Trust

If the plant staff does not trust management to do the right thing, even when it costs significant resources, then safety culture will be negatively affected.  How does one measure trust, with a survey?  I don’t think surveys offer more than an instantaneous estimate of any trust metric’s value.

Complacency

Organizations that accept things as they are, or always have been, and see no opportunity or need for improvement are guilty of complacency or worse, hubris.  Lack of organizational reinforcement for a questioning attitude, especially when the questions may result in lost production or financial costs, is a de facto endorsement of complacency.  Complacency is often easy to see a posteriori, hard to detect as it occurs.  

Management competence

Does management implement and maintain consistent and effective management policies and processes?  Is the potential for goal conflict recognized and dealt with (i.e., are priorities set) in a transparent and widely accepted manner?  Organizations may get opinions on their managers’ competence, but not from the regulator.

The NRC does not evaluate plant or owner management competence.  They used to, or at least appeared to be trying to.  Remember the NRC senior management meetings, trending letters, and the Watch List?  While all the “problem” plants had material or work process issues, I believe a contributing factor was the regulator had lost confidence in the competence of plant management.  This system led to the epidemic of shutdown plants in the 1990s.*   In reaction, politicians became concerned over the financial losses to plant owners and employees, and the Commission become concerned that the staff’s explicit/implicit management evaluation process was neither robust and nor valid.

So the NRC replaced a data-informed subjective process with the Reactor Oversight Program (ROP) which looks at a set of “objective” performance indicators and a more subjective inference of cross-cutting issues: human performance, finding and fixing problems (CAP, a known), and management attention to safety and workers' ability to raise safety issues (SCWE, part known and part unknown).  I don’t believe that anyone, especially an outsider like a regulator, can get a reasonable picture of a plant’s safety culture from the “Rope.”  There most certainly are no leading or predictive safety performance indicators in this system.

External influences

These factors include changes in plant ownership, financial health of the owner, environmental regulations, employee perceptions about management’s “real” priorities, third-party assessments, local socio-political pressures and the like.  Any change in these factors could have some effect on safety culture.

Unknown Unknowns

These are the factors that affect safety culture but we don’t know about.  While a lot of smart people have invested significant time and effort in identifying factors that influence safety culture, new possibilities can still emerge.

For example, a new factor has just appeared on our radar screen: executive compensation.  Bob Cudlin has been researching the compensation packages for senior nuclear executives and some of the numbers are eye-popping, especially in comparison to historical utility norms.  Bob will soon post on his findings, including where safety figures into the compensation schemes, an important consideration since much executive compensation is incentive-based.

In addition, it could well be that there are interactions (feedback loops and the like), perhaps varying in structure and intensity over time, between and among the known and unknown factors, that have varying impacts on the evolutionary arc of an organization’s safety culture.  Because of such factors, our hope that safety culture is essentially stable, with a relatively long decay time, may be false; safety culture may be susceptible to sudden drop-offs. 

The Bottom Line

Can safety culture be regulated?  At the current state of knowledge, with some “known knowns” but no standard approach to measuring safety culture and no leading safety performance indicators, we’d have to say “Yes, but only to some degree.”  The regulator may claim to have a handle on an organization’s safety culture through SCWE observations and indirect evidence, but we don’t think the regulator is in a good position to predict or even anticipate the next issue or incident related to safety culture in the nuclear industry. 

* In the U.S. in 1997, one couldn’t swing a dead cat without hitting a shutdown nuclear power plant.  17 units were shutdown during all or part of that year, out of a total population of 108 units. 

Regulatory Failure

...or how I learned to stop worrying and love the ROP.  A June 28, 2010 Wall Street Journal column titled, “Drilling for Better Information, The Financial Crisis and BP Share a Common Attribute: Regulatory Failure” (link below), while directed to the named cases, could (should) be considered by every regulatory body overseeing high risk technologies.  The highlighted quote near the end of the article provides the necessary impetus:  “When there is uncertainty about big risks, regulation ‘perpetually overshoots or undershoots its goals.’"   If true is there a legitimate question for nuclear regulation as to which it is doing?

Arguably the first issue would be, is there uncertainty about the big risks in nuclear power plant safety?  There is substantial reliance on PRA models and analyses of the plants’ hardware and safety systems and on that basis, “risk-informed” regulatory decisions are made.  The models are sophisticated, highly refined and accepted by most experts.  But does that mean we have confirmation of the risk values calculated in this manner?  Not clear.  But looking beyond the hardware to human performance, it becomes more clear that there is substantial uncertainty about this risk component.  The NRC and the industry have acknowledged both the importance of safety culture to nuclear safety and the lack of metrics to measure it.  (I suspect this will be addressed in an upcoming post by my colleague Lewis Conner when he talks about “known unknowns”.)  The ROP is the standard bearer for nuclear plant safety performance metrics but does not address culture or management performance.  The ROP indicators are almost universally green for all nuclear plants, making one wonder how well the ROP can differentiate performance.  And it would not be helpful to try to think of when ROP indicators have provided a leading signal of degrading safety performance.  The NRC seems content to assign responsibility for safety culture to licensees and regulate on the basis of outcomes.

If one concludes on this basis there is uncertainty about nuclear risks, is there a reason to believe the NRC is overshooting or undershooting?  I admit that I don’t really know.  At the most recent Commission meeting there was a colloquy regarding the value of the ROP vis-a-vis safety culture.  My recollection is that one of the NRR managers offered that the consistently good ROP metrics across the industry seemed to confirm that safety culture must be pretty good as well....then quickly amended his remark to note that no correlation between ROP and safety culture had been established.  So my concern is, does the NRC know where it is?  Undershooting or overshooting?

Can Safety Culture Be Regulated? (Part 1)

One of our recent posts questioned whether safety culture is measurable.  Now we will slide out a bit further on a limb and wonder aloud if safety culture can be effectively regulated.  We are not alone in thinking about this.  In fact, one expert has flatly stated “Since safety culture cannot be ‘regulated’, appraisal of the safety culture in operating organizations becomes a major challenge for regulatory authorities.“*

The recent incidents in the coal mining and oil drilling industries reinforce the idea that safety culture may not be amenable to regulation in the usual sense of the term, i.e., as compliance with rules and regulations based on behavior or artifacts that can be directly observed and judged.  The government can count regulatory infractions and casually observe employees, but can it look into an organization, assess what is there and then, if necessary, implement interventions that can be defended to the company, Congress and the public?

There are many variables, challenges and obstacles to consider in the effective regulation of safety culture.  To facilitate discussion of these factors, I have adapted the Rumsfeld (yes, that one) typology** and sorted some of them into “known knowns”, “unknown knowns”, and “unknown unknowns.”  The set of factors listed is intended to be illustrative and not claimed to be complete.

Known Knowns

These are factors that are widely believed to be important to safety culture and are amenable to assessment in some robust (repeatable) and valid (accurate) manner.  An adequate safety culture will not long tolerate sub-standard performance in these areas.  Conversely, deficient performance in any of these areas will, over time, damage and degrade a previously adequate safety culture.  We’re not claiming that these factors will always be accurately assessed but we’ll argue that it should be possible to do so.

Corrective action program (CAP)

This is the system for fixing problems.  Increasing corrective action backlogs, repeated occurrences of the same or similar problems, and failure to address the root causes of problems are signs that the organization can’t or won’t solve its problems.  In an adequate safety culture, the organization will fix the current instance of a problem and take steps to prevent the same or similar problems from recurring in the future.

Process reviews

The work of an organization gets done by implementing processes.  Procedural deficiencies, workarounds, and repeated human errors indicate an organization that can’t or won’t align its documented work processes with the way work is actually performed.  An important element of safety culture is that employees have confidence in procedures and processes. 

Self assessments

An adequate safety culture is characterized by few, if any, limits on the scope of assessments or the authority of assessors.  Assessments do not repeatedly identify the same or similar opportunities for improvement or promote trivial improvements (aka “rearranging the deck chairs”).  In addition, independent external evaluations are used to confirm the findings and recommendation of self assessments.

Management commitment

In an adequate safety culture, top management exhibits a real and visible commitment to safety management and safety culture.  Note that this is more limited than the state of overall management competence, which we’ll cover in part 2.

Safety conscious work environment (SCWE)

Are employees willing to make complaints about safety-related issues?  Do they fear retribution if they do so?  Are they telling the truth to regulators or surveyors?  In an adequate safety culture, the answers are “yes,” “no” and “yes.”  We are not convinced that SCWE is a true "known known" given the potential issues with the methods used to assess it (click the Safety Culture Survey label to see our previous comments on surveys and interviews) but we'll give the regulator the benefit of the doubt on this one.

A lot of information can be reliably collected on the “known knowns.”  For our purpose, though, there is a single strategic question with respect to them, viz., do the known knowns provide a sufficient dataset for assessing and regulating an organization’s safety culture?  We’ll hold off answering that question until part 2 where we’ll review other factors we believe are important to safety culture but cannot be assessed very well, if at all, and the potential for factors or relationships that are important to safety culture but we don’t even know about.

* Annick Carnino, "Management of Safety, Safety Culture and Self Assessment," Top Safe, 15-17 April 1998, Valencia, Spain.  Ms. Carnino is the former Director, Division of Nuclear Installation Safety, International Atomic Energy Agency.  This is a great paper, covering every important aspect of safety management, and reads like it was recently written.  It’s hard to believe it is over ten years old.

** NATO HQ, Brussels, Press Conference by U.S. Secretary of Defense Donald Rumsfeld, June 6, 2002. The exact quote: “There are known unknowns. That is to say, there are things we now know we don’t know. But there are also unknown unknowns.  These are the things we do not know we don’t know.”  Referenced by Errol Morris in a New York Times Opinionator article, “The Anosognosic’s Dilemma: Something’s Wrong but You’ll Never Know What It Is (Part 1)”, June 20, 2010.

When Money Motivates

A website that has caught our attention is called “Nudge” whose focus is on improving decisions and “choice architecture”. A June 1, 2010 post titled “When Money Motivates Employees and When It Doesn’t” includes some material that bears on issues of safety culture and safety management. The post is actually a video animated presentation and runs about 11 minutes.

As is common in the business world, and increasingly in the nuclear generation business, incentives are part of many employees’ compensation packages, and in the case of senior management can be quite substantial. Incentives can be cash bonuses, stock participation awards, or similar. Incentives are tied to the achievement of certain specified performance objectives that can target broad corporate level metrics as well as more specific ones associated with a manager’s responsibilities, e.g., plant capacity factor and budget. Safety performance metrics may or may not be explicitly part of the incentive program; safety may be viewed as an absolute performance requirement and sometimes as a condition precedent to access other performance incentives.

So, as the Nudge post asks, do money incentives provide an appropriate motivation for employees? Their short answer is only under certain limited circumstances. If an employee’s responsibilities are relatively simple and straightforward, involving mechanical skills or rudimentary cognitive skills, more reward leads to more performance. On the other hand if complex or sophisticated cognitive skills or creative thinking is required, then not only is the direct connection lost, the reverse may even be true - the incentive results in poorer performance.

Now this is social “science” theory put forward by a team of economists and sociologists and appears to be a “neat” formulation. But it is a little hard to judge the validity of the findings as only minimal information regarding the studies is provided. The authors claim that many, many similar studies come to similar conclusions, so the body of research may in fact be persuasive. I would have to say that my own experience is not necessarily consistent with these findings. Incentives can be a powerful driver of results - albeit often limited to the specific results targeted by the incentives - leading to unintended consequences in other performance areas that are not targeted or that may get sacrificed in the pursuit of the targeted goals.

This leads to what I found to be the more interesting observation from the “Money Motivates” post: the researchers believe the best approach is to pay people enough to effectively “take money off the table”, allowing them to balance all relevant job priorities. The researchers concluded that people are basically “purpose maximizers” meaning that we are motivated to achieve the overarching goals and purpose of our jobs. Problems arise when purpose and profit motives are not aligned or profit is paramount. Where safety is a vital component of purpose, it is possible to see where incentives can lead to compromises.

What is interesting to us is the intersection of incentives and the related issue of competing priorities and pressures on nuclear managers when balancing safety and other business objectives. Incentives are really just a different form of pressure, individualized to personal success and gain. Are there implications for nuclear safety management? How common are incentives for nuclear managers and what specific performance goals are targeted? How does safety performance factor in and is there the potential for safety and incentives not to be aligned? Has there been any assessment of the impact of incentives in cases where safety culture problems have occurred?