Cosmetic surgery on incentives won’t mean that Tesco does the right thing

Outlook It seems Tesco has taken to following the banking play book. Following a parade of ugly scandals that make Tesco’s mis-stated results look like a minor rounding error, the banks and their regulators came to the conclusion that if you give people an incentive to do the wrong things then they will do the wrong things.

Change the incentives and you change the behaviour – that’s the theory. Tesco’s remuneration committee appears to agree. In 2014, 50 per cent of its executives’ annual bonuses were based on trading profit, 26 per cent on “strategic financial performance measures” and the rest on cuddly stuff such as being nice to staff and customers. This coincided with that profit overstatement.

Now, however, 50 per cent of the company’s annual bonus payments will be linked to sales and 30 per cent to trading profit, with 20 per cent allocated to “individual measures” – presumably encompassing some of that cuddly stuff. Or perhaps Tesco’s remuneration committee just thinks that if you aren’t at least a little bit cuddly, you won’t sell so much.

Here’s the problem. It could be said that Tesco is simply swapping one flawed set of metrics for another. Blindly shooting for sales at all costs could prove as destructive as blindly prioritising trading profit, particularly in the hands of a bad chief executive (although I’ve no reason to believe Dave Lewis is that).

It’s worth noting that the 2014 bonus criteria were themselves changed from those in effect in 2013, when shareholders were told the bonus would be 70 per cent based on underlying profit performance and 30 per cent on “key strategic objectives”.

And the 2013 criteria? You’ve guessed it. They were changed from those in 2012.

Despite the awful mess Tesco got itself into, what it never seems to have considered is that there might have been more at fault than the metrics it was using to assess whether it paid its executives a bonus of half a million, a million, or (on occasion) nothing at all – that in fact, the entire structure might have been flawed.

No, far easier to make a few cosmetic changes while everyone crosses their fingers in the hope that Mr Lewis’s good start continues and he does a better long-term job than his predecessor Philip Clarke – while promising to try to force the latter to pay back his golden goodbye if he’s found to have been grossly negligent. Which is meaningless given the number of criteria to be satisfied before any lawyer in his right mind would put their name to the costly legal action that would be required.