Page 503 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 8. Long-Term Incentives 489

6. Requires no special target setting
7. Ties the high performer to the company
8. Has no earnings charge
9. Has no dilution to shareholder equity
10. Is tax deductible to the company
11. Is not taxable to the individual
12. If taxable, is tax deductible to individual
13. Requires no investment by the individual
14. Has no downside risk for the individual
When considering the objectives of the long-term incentive plan, first determine the two
or three most important objectives and then identify the performance measurements best
suited to those objectives.
Performance Measurements. Performance can be measured using internal measurements
(financial and other), market value of company stock, or some combination. Additionally, they
may relate to peer performance rather than individual company results. As stated earlier, FAS
123R differentiates between performance condition plans (which measure financial performance
other than stock prices or related measures) and market condition plans which measure stock
appreciation and/or stock price relative to other selected companies. Outcomes can adjust the
earnings charge of a performance condition plan but not for a market condition plan.
Performance-share plans have value based on stock price and the attainment of finan-
cial goals. Performance-unit and other cash plans have their value determined solely by
financial performance. Many of these measurements are similar to those described in
Chapter 7 (“Short-Term Incentives”) except that they are evaluated over a longer period of
time, typically the compound average over the performance period or the period-ending
value. Earnings per share, return on equity, and total shareholder return are among the
most frequently used measurements. A representative list might include the following
(see Chapter 2 for definitions):
• Cash flow
• Earnings
• Earnings per share
• Economic profit
• Equity growth
• Market share
• Net-worth growth
• Operating income
• Return on assets
• Return on equity
• Return on invested capital
• Return on sales
• Revenue
• Total shareholder return
Like short-term incentives, long-term incentives typically set a threshold, target, and
maximum objectives. Target is the expected performance outcome for fully satisfactory per-
formance. Although there may be some difficulty in meeting target, it is believed to be fully
attainable. Threshold is the first payment above zero. While it is the minimum performance