Page 55 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 2

Performance Measurements

and Standards

B efore going any further, it is important to take time to identify and describe
measurements and standards of performance that can be used in compensating
executives. A standard, or stated objective, is intended to improve performance
(typically, by a stated amount).

UNDERSTANDING PERFORMANCE MEASUREMENT
The performance measurement is an outcome-based metric that determines the extent to which
the objective has been achieved. Linking outcome to pay results is pay for performance. There
are two types of measurements: quantitative and qualitative. Quantitative measures are finan-
cial and nonfinancial. Either may be internal to the company or external.
Whose Performance?

Performance measurements can be based on total company performance, individual perform-
ance, or an identifiable unit between the two extremes. Financial measurements dominate
company performance and subunits thereof, whereas individual performance is more likely to
be measured in nonfinancial goals or objectives. It is not uncommon for an executive’s per-
formance rating to be a combination of his or her own performance, the performance of his
or her division/department/strategic business unit (SBU), and overall company performance.

Measurement Types
As indicated, there are two measurement types: financial and nonfinancial. We’ll begin with the
financial measurements internal to a company. Financial measurements date back hundreds
of years. And keep in mind that whether addressing the income statement, the cash flow

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