Page 88 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

74 The Complete Guide to Executive Compensation

• Are the factors being measured and the measurements understandable to those being
rated?
• Is the degree of difficulty comparable across the organization for similar
positions/jobs?
• To what extent are individuals able to achieve the stated performance based on their
own efforts? And for group plans, to what extent are the individuals able to at least
significantly affect the results?
• Will individuals be able to receive regular feedback on progress?
• Are the raters objective and not subject to bias?
• Has the plan been successfully tested?
• Will the measurements place the company in a cost-effective position with other
comparable companies?

Alpha vs. Numeric Ratings. Typically, whatever is being measured is translated into either
an alpha or numeric score, thereby enabling not only comparisons with the threshold, target,
and maximum values, but also with the scores of others (who may not be measured on exact-
ly the same items). These measurements are then converted into a pay action. This is
described in more detail in Chapters 5 (“Salary”), 7 (“Short-Term Incentives”), and 8 (“Long-
Term Incentives”).

SUMMARY AND CONCLUSIONS

Performance consists of drivers and metrics. The drivers are the objectives (the standards, the
desired outcomes); they are the focus of attention of those with the objective. The metrics are
the measurements of the results versus the objective, determining the degree of success.
In designing a pay-for-performance plan, the first and clearly one of the most important
steps is to determine what performance will be measured. Will it be financial, nonfinancial,
or a combination of the two? Will it be based on individual, group, or a combination of
the two? Will there be a hurdle (minimum level) before payment will be made? Will there
be a target? Will the performance relative to other companies in one’s peer group be
assessed? These are all-important issues to be examined because empirical evidence suggests
that what gets measured gets attention. The attention is even greater if it is the basis for
earning money.
An additional question that needs to be addressed is will the same measurement(s) be
used for salary, short-term, and long-term incentives? Typically, the answer is “no.”
Individual performance typically is the sole basis for salary actions, while the basis for short-
term incentives is often combined with group (up to and including company-wide) perform-
ance, and only group performance is the basis for long-term incentive payouts. For example,
a salary increase might be for satisfactorily doing the routine, day-to-day work, whereas
the short-term incentive might be based on several specific individual objectives as well as
the extent to which a group objective was achieved (e.g., economic profit). The long-term
incentive might be tied to earnings per share and shareholder value increase vs. a defined peer
group of companies. Chapter 5 (“Salary”), Chapter 7 (“Short-Term Incentives”), and
Chapter 8 (“Long-Term Incentives”) will explore these approaches in more detail. A key
factor is avoiding paying more than once for a particular measurement over a prescribed
period of time.