Page 85 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 2. Performance Measurements and Standards 71

What Is the Performance Period?
The typical performance period for executives is the business year (calendar or fiscal, depending
on the company), although quarterly periods within the year might also be established. While
performance is tracked during the period, it is only measured for pay purposes after the perform-
ance period has been completed. The emphasis is on results, not efforts, although some per-
formance evaluations may include a degree of difficulty factor as well as how the work was done.

How Are Goals Weighted?
If more than one measurement is used, the question is, What weight should be given to each?
The answer is: It depends. If each is of equal importance, then each is of equal weight. That
is the first step in the weighting process. If they are of equal weight, stop. If not, attempt to
determine the rough order of magnitude. If, for example, there were four objectives, it might
be determined that “A” was four times as important as “D,” two times more important
than “C,” but only slightly more important than “B.” However, if “B” were viewed as
three times as important as “D,” relative weighings would be as follows: “A” (40 percent), “B”
(30 percent), “C” (20 percent), and “D” (10 percent).

What Gets Communicated and When?
Individuals should know what is being measured and how before the beginning of the meas-
urement period. They should also receive regular reports during the period on progress in
relation to the identified target. If these two steps are not performed, how can one expect to
motivate performance? People need to know the basis for measuring performance especially
as it relates to pay. It is important during the communication phases to show how individual
performance is aligned with the identified objectives. This is the line of sight alignment.
Furthermore, the specific link between performance and pay needs to be clearly described.

How Does Data Get Measured?

This is not a course in statistics, but it is important to quickly highlight some of the more
common ways to measure data. Where there is more than one measurable item, data is
measured in terms of some definition of average central tendency and/or in terms of
dispersion/distribution.
Central tendency consists of the mean, median, and mode. The mean is the sum of the
individual items divided by the number of such items. The median is the middle value of
the data after it has been arrayed low to high in value. The mode is the most frequent value,
meaning a value must be repeated at least once (thus describing the frequency of occurrence).
If there were two such most-frequent values, there would be a bimodal average.
The mean is the most commonly used, although it is distorted by data significantly high-
er or lower than the other values being measured. The median is not subject to such distor-
tions but must be arrayed in ascending value in order to be calculated. The mode is easily
observable, but only if the data is arrayed with the same values clustered. It may not be
statistically significant if there are not many data points.
Distribution may be defined in terms of range (low to high) or in relation to a measure-
ment of central tendency (typically the mean). This can be shown graphically with a vertical
(Y) axis and a horizontal (X) axis. In the example shown in Figure 2-2, the percentage increase