Page 81 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 2. Performance Measurements and Standards 67

Return on assets (ROA)
Relative Returns Return on net assets (RONA)
Return on sales (ROS)
EBIT
Absolute Changes EBITDA
Gross margin
Customer satisfaction
Customer retention
Expense budget
Nonfinancial Innovation
Intellectual capital
Productivity
Quality
Quantity

Table 2-10. Possible subunit measurements

External Measurements

Like internal measurements, there are two categories of external measurements: financial and
nonfinancial.
Financial Measurements Outside the Company There are three types: performance of
other companies, ratings by outside organizations, and general economic factors.
• Performance of other companies These measurements are typically relative to
own company performance and could use any of the measurements identified as inter-
nal to the company. The purpose is to show how well the company is doing relative
to others. An excellent example of this is the stock chart required to be included in the
company proxy statement for publicly traded companies. It could be a company-
defined group of companies, an industry sub-set within the appropriate stock
exchange, or the composite performance of the entire stock exchange. Such measure-
ments are for shareholder value. However, some companies have designed annual and
long-term incentive plan payouts in relation to how well the company has performed
against a defined peer group of companies on such factors as earnings per share, eco-
nomic profit, and return on sales, to mention a few. Valid peer comparisons are very
difficult to do because no two companies are alike; however, the objective is to view
the comparison from the eyes of an investor trying to decide in which company (in a
particular sector) to make an investment.
• Ratings by outside organizations The Corporate Library, Institutional
Shareholder Services, Moody’s, and Standard & Poor’s head the list of organizations
that do their own analyses of the health of companies.
• General economic factors Own company performance could be adjusted in light
of changes in economic factors. Two key measurements would be the cost of capital