Page 84 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

70 The Complete Guide to Executive Compensation

continues to cascade down through the organization. If done effectively, at lower levels, an
employee can see his or her own objectives contribute to the top organizational objectives.
This assessment is referred to as line of sight, in other words, a straight-line relationship of
aggregating performance going up the organization, leading to organization-wide objectives.
The performance management process will be described more fully in Chapter 5 (“Salary”).
There are two types of measurements: input based and output based. Input-based meas-
urements evaluate what the individual has or possesses. Input consists of knowledge and val-
ues and describes what a person can do. Output-based measurements define how a person
might do it. Output-based measurements evaluate what was done and how it was done.
Input-based measurements are helpful in selecting individuals for work (ranging from initial
hire to subsequent promotions); output-based measurements are used for pay actions.

How Are Targets Set?

Targets typically are set in relation to past performance, future expectations, and/or perform-
ance of comparable companies. Historical (or look-back) targets are improvement-focused in
relation to a defined base. Future expectations (or look-forward) are described in quantitative
ways (perhaps with a look at past performance). Peer performance (or look-around) is focused
on outperforming organizations in one’s own industry.
Typically, the desired performance level is called the target. A predetermined range
around it establishes both a threshold and a maximum. The threshold is the minimum level of
performance below which no incentive payment will be made; the maximum is the upper
limit beyond which no credit will be given for accomplishment.
These three levels of performance are shown in Figure 2-1 along with their respective
incentive awards. This concept will be further developed in Chapter 7 (“Short-Term
Incentives”).
Obviously, it is important that whatever is being identified can be measured and that the
outcomes are at least influenced, if not totally controlled, by the person being rated. It is
equally important to identify those factors outside of the rated person’s control and their
degree of significance. If setting targets for different measurements and for different parts of
the business, the degree of difficulty should be included. These are called stretch targets. They
should be of equal difficulty rather than equal in absolute or percentage improvements.

Maximum
Award
Target
Award

Threshold
Award

Threshold Target Maximum
Performance Performance Performance
Figure 2-1. Threshold, target, and maximum performance and bonus opportunities