Railway Reform: Toolkit for Improving Rail Sector Performance - ppiaf

Railway Reform: Toolkit for Improving Rail Sector Performance
10. Corporate Governance
The enterprise compensation system includes basic wages and salaries, pension
agreements, profit sharing, share-based compensation schemes, and incentive
systems for all staff. Usually the board of directors is deeply involved in designing
the compensation system and ensuring that performance indicators align with
shareholder objectives. Most boards have a compensation committee and often
contract with external human resource and compensation specialists to review
and develop a comprehensive compensation system.
Basic compensation decision making protocols are as follows:
• The board of directors sets CEO compensation
• The railway company determines the basis for establishing compensation
levels—usually in a human resources department. The board oversees basic
compensation structure and incentive programs, but does not set actual
compensation levels.
• Shareholders determine fees paid to board of directors and board committees
10.5.3 Profit-sharing system
Performance indicators
Most incentive structures are based on performance indicators–typically each
business unit department or function has a specialized set of indicators that
measure the performance of the unit or function as it contributes to the railway
enterprise strategy.
To motivate employees to achieve the objectives, incentive compensation system
targets and goals must be achievable with above-average efforts. Incentives
should be developed and adapted annually by setting new targets aligned with
company strategy. Each employee participating in the incentive scheme should be
assigned multiple performance indicators, but not so many that the system becomes
too complex to manage and adjust.
Types of incentives
In general, the principle in building incentive programs is to weight them in favor
of longer-term goals. For example, more than 50 percent of CEO incentives
should be based on long-term performance measures.
Typically, top management has long- and short-term goals, key operational personnel
have shorter-term goals, and for staff below that, ‘normal’ bonus systems
are applied that have no specific railway enterprise features. These bonus systems
follow common practice for personnel and payroll administration.
Long term incentives and their application
Long-term incentives are paid to top management and to managers who can influence
long-term railway development. Typically, incentives measures are key
performance indicators for longer-term (more than one year) corporate performance
and strategic development. Incentive shares can range from 10 to 40 percent
of annual compensation, depending on staff position and responsibilities.
The World Bank Page 167