Pay for Results: Aligning Executive Compensation with Business Performance

259 Pages·2009·2.13 MB·English

by  Mercer

Pay
for
Results
A
LIGNING
E C
XECUTIVE OMPENSATION
WITH
B P
USINESS ERFORMANCE
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Pay for Results
Aligning Executive Compensation
with Business Performance
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Pay for Results
Aligning Executive
Compensation with Business
Performance
Mercer
John Wiley & Sons, Inc.
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Copyright © 2009 by John Wiley & Sons, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Pay for results : aligning executive compensation with business performance / Mercer.
p. cm.
Includes index.
ISBN 978-0-470-18390-8 (cloth)
1. Executives—Salaries, etc. 2. Chief executive offi cers—Salaries, etc. I. Mercer (Firm)
HD4965.2.P39 2009
658.4'072—dc22
2008052081
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
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Contents
Preface ix
Acknowledgments xiii
Chapter 1 A New Day: The Call for a Demonstrable
Link between Pay and Performance 1
Executive Remuneration Governance 1
Achieving the Right Balance of Interests 7
Performance Measurement as the Key to Good
Governance 10
Change Is in the Air 10
Pay for Performance Today 12
Bringing Defensibility to Executive Remuneration 17
Chapter 2 The Million Dollar Question: What Is Good
Performance? 21
Performance as Value Creation 23
No Magic Number 27
Requirements for Effective Performance
Measurement 30
v
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vi contents
Metric Selection 31
Linkage 36
Goal Setting 37
Time Horizon 38
Striking the Right Balance 41
Chapter 3 Back to Basics: An Introduction to Mercer’s
Performance Framework 43
Why Manage for Shareholder Value 44
Systems Thinking 45
Alignment of Internal and External Value
Defi nitions 48
Value Creation Demystifi ed 51
Balancing Growth and Returns 52
Mercer’s Performance Measurement Framework 54
Case Study: Performance Measurement at
Manufacture Co. 60
One Size Doesn’t Fit All 63
Chapter 4 Trust, but Verify: Bringing Defensibility to
Performance Metric Selection 65
Metric Selection in a Nutshell 66
Market Research: A Limited, but Informative Tool 69
The Science of Metric Selection 71
The Art of Metric Selection 84
A Balancing Act 87
Chapter 5 Making It Count: The Case for the Unbalanced
Scorecard to Drive Behavior 89
Try, Try Again 90
From Solutions to Guiding Principles 95
Make It Motivational 96
Make It Meaningful 101
Make It Fair 105
The Future of Scorecards 107
Custom Solutions 112
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Contents vii
Chapter 6 There’s Nobody Quite Like Us: The Ins and
Outs of Meaningful Peer Comparison 115
Why Peer Groups? 116
Screening for Peers 118
Desperately Seeking Peers 125
When One’s Not Enough 129
Maintaining Peer Groups 132
Peer Groups in Practice 132
What’s Next? 134
Chapter 7 You Don’t Need a Crystal Ball: Taking the
Guesswork Out of Target Setting 137
What’s Fair? 138
Setting Performance Targets 141
Internal Target Setting 142
Externally Informed Target Setting 143
Relative Target Setting 149
Requirements of Relative Target Setting 153
No Simple Answers 155
Chapter 8 Passing the Big Test: Calibrating
Pay and Performance 157
Incentive Plan Leverage 158
Leverage and Long-Term Incentive Vehicles 162
Leverage and Goal Setting 164
Simulation Modeling 166
Maximum Award Caps 170
Assessing Plan Costs for Reasonableness 172
Passing the Big Test 174
Chapter 9 Now What? Avoid Managing by Exception 177
Designing Incentive Plans for Maximum Flexibility 179
Dealing with Unavoidable Adjustments 182
The Question of Discretion 185
Dealing with Business Change 187
Walking a Fine Line 194
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viii contents
Chapter 10 More Than the Sum of Its Parts: Bringing
It All Together 195
Getting Started 197
The Implementation Road Map 207
The Benefi ts of a Performance Measurement
Mind-Set 211
Bringing It All Together: A Performance
Measurement Checklist 214
About the Authors 221
Index 225
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