Page 82 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

68 The Complete Guide to Executive Compensation

and corporate income taxes. One could argue that it is misleading to compare histor-
ical performance or even the cost of capital or corporate-taxes change against budget-
ed expectations when either of these factors is changed. More specifically, one would
expect better financial performance if interest rates and/or corporate income taxes
decline. Conversely, one would expect poorer performance if the reverse were true.
However, some planners attempt to avoid such comparison difficulties by using meas-
urements that exclude their impact. For example, EBIT (earnings before interest and
taxes) excludes both, while both are included in net earnings.
Other Key Measurements Outside the Company
• Customer satisfaction Measured by surveys and/or focus groups, this is an indica-
tion of future sales potential company-wide and/or by division. Satisfied customers
will buy again; dissatisfied customers will not. Both will tell others; so their experi-
ences also affect future sales. Items measured are quality of product/service in relation
to price. Such surveys may also include delivery of undamaged goods, goods when
promised, back-up warranty with fast repair, and fast response to information requests
and complaints. When measuring the level of customer satisfaction with own prod-
ucts/services, it is important to put this assessment in terms of customer needs and
expectations. Why do the customers who like us value our products/services? What
one thing do we do best? What one thing is our greatest opportunity for improve-
ment? Of those who do not value our products/services, what three things must we
address to gain their approval? And who are the major competitors and how do they
measure up?

• Customer retention This is a measurement of the percentage of customers who
come back to buy again. What percentage of first-time customers come back? What
percentage keeps coming back? The shorter the interval between their return and the
longer the period of continually coming back, the more impressive the indicator.

• Environmental compliance This is a measurement of how well the company is per-
forming in terms of air and water pollution, complying with regulatory requirements.
What is the likely financial exposure of noncompliance?

• Management cost ratio The ratio of CEO pay to a stated financial measurement
(e.g. earnings, market capitalization, or sales) can be compared to ratios of comparator
companies. The lower the ratio, the more expensive the cost of management. The
same calculation can be made for the combined pay of the five proxy-named executives.

Combination Financial and Nonfinancial Measurements Comparing own financial
performance with that of others on earnings per share and stock price could be combined
with measurements of customer retention and satisfaction.

Combination Internal and External Measurements

To determine which measurements would be most appropriate, consider the industry, stage
of the market cycle, strategy focus, and organization structure. The industry will suggest fac-
tors on the income statement and balance sheet that will be most significant, as well as the
importance of the cash flow statement. Comments on these were made earlier when review-
ing the various financial measurements. As for market cycle stage, as shown in Table 2-11,