Often, pay-for-performance compensation plans are designed to satisfy external influencers, such as ISS or Glass Lewis. However, companies that don’t consider measures beyond TSR may find their programs don’t meet shareholder interests over the long-term.
Managing Director Matt Turner offers ideas on how you can fine-tune your compensation program with other more effective financial, operational, and strategic measures.
Transcript
"Pay for performance. In the last ten years these words have gone from boilerplate phrasing in everyone's CD&A, to a testable and quantifiable concept, with shareholders now expecting companies to demonstrate their commitment to pay-for-performance.
To criticize the ISS test, as well as the Glass Lewis test, and now the Dodd-Frank test, is to invite an alternative. We have our points of concern about each of these tests, and while every public company must be aware and take mind of pay-for-performance results vis a vis these external tests, it's a worthwhile exercise to define a company specific pay-for-performance perspective.
As a public company, you have to acknowledge that relative TSR is, in fact, the common denominator. It must be a part of the definition. However over a relatively short time period, say the three years that is common for the ISS and the Glass Lewis tests, it is possible that relative TSR doesn't tell the whole story. So this raises a question. What other performance dimensions belong in your pay-for-performance perspective?
First, define your centerpiece financial performance measures. These are the measures that capture profitable growth and adequate returns consistent with your company context.
Second, consider operational and strategic measures that ultimately drive financial and market performance. The combination of market, financial, and operational measures, form a performance measurement framework that by and large should be reflected across annual and long-term incentives.
Next, in addition to modelling potential outcomes with respect to ISS and other tests, model the outcomes in light of your company's specific perspective. The key point is that pay-for-performance analytics are about more than compliance and satisfaction of external tests. They're about fine tuning executive compensation programs to ensure they best serve shareholders."
