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Pay for Results: Aligning Executive Compensation with Business Performance

Pay for Results: Aligning Executive Compensation with Business Performance

Mercer, LLC

ISBN: 978-0-470-47811-0

Mar 2009

256 pages

Select type: E-Book

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The numerous incentive approaches and combinations and their implications can be dizzying even to the compensation professional. Pay for Results provides a road map for developing and implementing executive incentives that drive business needs and strategy. It is filled with specific analytic tools, including tables, exhibits, forms, checklists. In addition, it uncovers myths in performance measurement strategy and design. Timely and thorough, this book expertly shows businesses how to drive their specific needs and strategy. Human resources and compensation officers will discover how to apply performance metrics that align with shareholder investment.

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

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 Definitions 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

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

Chapter 10 More Than the Sum of Its Parts: Bringing It All Together 195

Getting Started 197

The Implementation Road Map 207

The Benefits of a Performance Measurement Mind-Set 211

Bringing It All Together: A Performance Measurement Checklist 214

About the Authors 221

Index 225