Portfolio
Substantial healthcare mutual business
A confusing incentive program that encouraged game playing was holding this major healthcare business back. Juno Partners helped redesign the Group's management systems to drive performance and accountability.
Background
Our client is a leader in the health insurance sector, with a proud history stretching back over 100 years. It is also a mutual business, a structure that is relatively rare today where the customers are also the owners of the business. While its history and structure remain wonderful selling points with customers, its CEO is determined for the Group to remain innovative and bold in facing new challenges and executing its strategic plan that calls for substantial growth.
The problem
Soon after his appointment, the Group’s CFO became concerned that its mutual structure meant managers and staff sometimes saw profit as a dirty word and yet in the absence of being able to raise capital from its owners, retained profits were the only way the business could fund its growth ambitions.
This lack of clarity of purpose was reflected in the Group’s incentive program which included a plethora of often contradictory measures. The CFO also realized that because incentive targets were tied to the budget, middle managers would sandbag their budgets, overstating expected expenses and understating expected revenues to ensure their team did not go home empty handed at the end of the year. The resulting lack of ambition in the Group’s plans was greatly concerning to the CFO and played havoc with capital allocation.
The CEO was aware of these issues and noted it also created a deep sense of cynicism with many managers who saw others benefit from playing these games, while they missed out by doing the right thing.
Instead of the Group’s management systems – the way they measured performance, structured incentives, prepared budgets and plans and allocated capital – helping them achieve their goals, it was actively hindering performance.
The solution
Recognising the value of independent, expert advice to address this problem, the CEO engaged Juno Partners to review the Group’s management systems and in particular the way performance was measured and incentives determined and make recommendations for change.
Drawing on interviews with directors, executives and middle managers and our deep experience with incentive plan design, we prepared a report for the CEO and CFO of the key drawbacks of the existing performance management system and how they could be addressed.
With Board approval, and with our involvement, implementation of our recommendations began and over a period of nine months an overarching measure of financial performance was introduced that took into account profitability and return on capital. The new metric was put at the heart of the incentives system which rewarded sustained gains, was decoupled from the budget process and strengthened by including a deferral of above target payments.
These changes were accompanied by changes to reporting and an education campaign that drew on the concerns raised by managers in the interview stage and how these were addressed by the new approach to performance measures and rewards.
The new performance management system has supported the move to a more nimble, entrepreneurial culture that the CEO has identified as vital for the execution of the Group’s strategic plan and the business is now well positioned to take advantage of the exciting growth opportunities that it faces.