Page 80 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

66 The Complete Guide to Executive Compensation

product of the expenditure). This is an output-cost model. Some will measure the
time from discovery (or development) until the product is marketed, namely, how
long does it take to bring a product to market? This is a process or calendar model.
Others will measure the prevalence of new products as a percentage of total sales
(e.g., 20 percent of total sales came from products not sold the previous year, or 80
percent of total sales came from products not sold five years ago). This is a revenue
output model. One would expect the percentage to increase with an increase in the
period of time measured.
• Productivity If output is defined as volume times cost, then productivity increases can
come from increasing volume with no increases in cost, decreases in cost with no
decrease in volume, or increases in volume and decreases in cost. Productivity can be
measured at all levels of the organization. Operating income divided by total employees
in the unit might be a productivity indicator.
• Quality This is defined in terms of nearness to perfection at any level of the com-
pany. Some have chosen the six-sigma standard, in other words, 99.99966 percent per-
fect (stated another way, only 3.4 imperfect products for every one million produced).
The quality standard selected should be consistent with the requirement, especially if
the product is delivered at higher cost; otherwise, the lower-cost product would be the
obvious choice of the buyer.
• Quantity This is volume, or the number of units produced or sold at any level of
the company. It excludes cost and price. It is useful in netting out price changes in
measuring productivity.

Combination of Financial and Other Key Measurements. It is more difficult to motivate
individuals with multifactor performance measurements than with a single measuring stick
because it requires the person to focus on a number of different items, some of which, at least
on the surface, may appear to be contradictory. Nonetheless, multimeasurement systems add
balance to the process.
It would not be unreasonable to have a measurement combining innovation, productiv-
ity, customer satisfaction, employee commitment, and financial results. Designing the most
appropriate mix must be company specific. It is also likely that the measurements will change
from time to time. At the minimum, they should be reviewed annually to ensure they are still
focusing on the key components.
Subunit Measurements. Because of their composition, some measurements are not appro-
priate for subunits of the company, whereas all of the ones discussed so far could be used at
the corporate level. Shown in Table 2-10 are some that could be used in subunits of the
company. In selecting the ones to be used, make a determination of whether to use the same
definition on a company-wide plan as well. For example, if operating income is used for
a division plan and the division head will be paid partly on company and partly on division
performance, should the company plan also include operating income, or perhaps EBIT, or
EBITDA?
Some of these measurements will be more relevant than others. For example, if the
subunit is dedicated to manufacturing, RONA and gross margin would probably be more
relevant than innovation. If it is a research unit, innovation might be key, whereas with a sales
unit, customer satisfaction and retention would be high on the list.