Page 83 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 2. Performance Measurements and Standards 69

there is almost a reciprocal relationship between sales and earnings. At the threshold stage,
revenue is key as the company looks to establish market position. Profits may be nonexistent
because of development and marketing costs. In the growth stage, market penetration to
increase market share is still key, but profits are becoming important. At maturity, revenue
has slowed and profits are high in importance. And in decline, revenue is decreasing but
opportunities still exist.
The industry, market stage, strategy focus, and organization structure measurements
identified can be measured both for the company itself as well as in relation to identified peer
companies. In other words, the internal performance (both financial and nonfinancial) is
assessed and the results compared with external measurements to see how well the company
is doing vs. others and in light of major economic factors affecting profitability.

Category Threshold Growth Maturity Decline
Revenue (sales) High High Moderate Low

Profits (earnings) Low Moderate High High

Table 2-11. Market stage vs. revenue and profit importance

As described in Chapter 1, strategy focus could be community partnership, customer sat-
isfaction, employee intimacy, operational optimization, product/service innovation, and/or
shareholder return. Community partnership would measure environmental compliance.
Customer satisfaction would measure customer satisfaction and customer retention.
Employee intimacy could be measured by employee-attitude surveys, undesirable separa-
tions, charges of discriminatory treatment, and improvements in the core-competence
knowledge of the workforce. Operational optimization would measure productivity in terms
of quality and quantity. Product/service innovation could measure the input, process, and/or
output of such efforts (as described earlier in this chapter). And shareholder return would
measure the various shareholder return formulas described.
Organizational structure will affect not only the level at which the measurement is made
but also, given the definition of measurements available, the type most likely used. A central-
ized organization is likely to emphasize corporate measurements; a decentralized organiza-
tion is more likely to emphasize measurements at lower levels in the organization. To the
extent the latter have no shareholder equity or decisions on taxes and debt, the financial for-
mulas available are even more limited. Nonetheless, a number of possibilities were identified
earlier in this chapter.

HOW DOES IT GET DONE?

Who Determines What Gets Measured?
The measurements for the CEO are typically set by the board of directors and heavily influ-
enced by shareholder input. The measurements for the first level below the CEO are set by
the CEO and reflect an allocation of his or her own objectives, in addition to those that the
CEO and subordinate also believe appropriate. This breakup and allocation of objectives