Page 185 - Accelerating out of the Great Recession

ACCELERATING OUT OF THE GREAT RECESSION

in the stock market. Performance metrics for such com-
pensation should be based on relative as well as absolute
performance through indexing to the performance of a
properly designated peer group.
3. The measurement of performance that executives can influ-
ence directly. Overall company performance may be an
appropriate metric for the top executives of a company.
But the lower one goes in the executive ranks, the less
control executives have over corporate-wide outcomes,
and the less relevant such outcomes become as incen-
tives. In general, executives at the business-unit level
should be evaluated according to financial and opera-
tional performance metrics that are relevant to the units
they lead.
4. A focus on value creation, not just on earnings or the profit
and loss (P&L) statement. The internal performance met-
rics a company uses should take into account how execu-
tives use the capital entrusted to them, not just whether
they are able to meet plan targets to grow earnings per
share or the P&L statement. This means that executives
should be held accountable for the size and sustainability
of the cash flows they generate after reinvestment as well
as for the capital bets that they make.
5. The minimizing of the asymmetries of risk. For executives
truly to act like owners, they need to experience the same
kind of risks that normal investors do. In addition to
allowing executives to enjoy the benefits of a potential
upside, an effective incentive compensation system also
must ensure that they suffer the costs of the potential
downside by putting some portion of their own wealth at
risk. The furor over bankers’ pay quite rightly highlights

■ 164 ■