Page 89 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 2. Performance Measurements and Standards 75

Since short- and long-term incentives are the best vehicles for pay for performance, it is
critical that the performance factors be carefully identified and defined. Problems in recent
years with companies engaging in off-balance-sheet transactions and revenue recognition
changes to improve their financial position suggest that the rewards are significant but not
enormous. The more emphasis companies place on plans that reward handsomely for finan-
cial performance, the more careful they should be in ensuring that the numbers are both
legally and morally defensible. For example, including items such as pension income to deter-
mine executive incentive pay is inconsistent with pay for company performance. A seven-
digit dollar amount will be sufficient in most cases; when the decimal place is shifted one or
two places to the right, it may be too tempting for some to focus solely on the money.
Table 2-12 summarizes the major design considerations when selecting performance
measurements. Within the framework of the design considerations listed in Table 2-12, the
action steps are listed in Table 2-13.

1. Individual vs. group performance
2. Objective vs. subjective factors

3. Financial vs. other measurements
4. Ability to influence outcome

5. Rater ability to measure performance

Table 2-12. Performance measurement design considerations

1. Identify the ratees and the raters.
2. Identify and define the factors to be measured.
3. Determine how outcomes are to be measured.
4. Test the measurables and make necessary adjustments.
5. Train both ratees and raters in the measurement process.
6. Communicate performance measurements as part of the short-term and long-term incentives
(See Chapters 7 and 8).

7. Analyze the results, making needed adjustments in what is measured and how it is measured.

Table 2-13. Performance measurement action steps

Having reviewed the framework for executive compensation plans and the performance
measures and standards that can be used in determining the basis for payment, in the next
chapter we’ll look at when payment is made, namely, currently or deferred to a later date.
Note: You should not rely on accounting, tax, SEC, or other professional service statements
in this chapter. You need to seek appropriate professional counsel for such guidance.
Statements made in this chapter and elsewhere are offered as being illustrative to help you
frame such further investigations with the help of counsel.