Tag Archives: performance metrics

New revenue recognition standard— don’t ignore the impact on compensation

by Cydney Posner

At the recent Bloomberg BNA Conference on Revenue Recognition,  a Deloitte partner observed that, to the extent that, in awarding compensation, companies use metrics that are keyed to revenue, the new revenue recognition standard could affect compensation or bonus plans because the ways of measuring and the timing of recognition of revenue change. He reminded attendees that, “‘when those plans were put into place, whatever they were, they overlap years. You then have the question of, ‘they set up some sort of benchmark and we’re going to pay someone a bonus based on how they do against this metric’— the problem is that metric was designed based on the old rules and you basically changed how you’re going to keep score.’” (See this article in Bloomberg BNA.) Continue reading

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Filed under Accounting and Auditing, Executive Compensation

Is relative TSR still the performance metric of choice?

by Cydney Posner

According to a just-released report from Equilar, an executive compensation and corporate governance data firm, “relative total shareholder return” continues to be the most common performance measure used in long-term incentive plans for CEOs among S&P 500 companies.  However, after years of increasing prevalence among companies in this group, use of rTSR flattened out in 2015 as a performance metric for CEO pay. At the same time, use of return on capital and earnings per share as performance metrics each “saw a bump,” the related press release indicated. Does this data portend a change? Continue reading

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Filed under Corporate Governance, Executive Compensation

Are the days of “I’ll-scratch-your-back” cronyism history?

by Cydney Posner

As discussed in a PubCo post last week, a theory that is currently gaining purchase is that, whether as a result of say on pay or otherwise, the increased influence of proxy advisory firms has led to a kind of homogenization of executive pay packages based on standard metrics.  This piece in the WSJ, by a former CFO, argues that these types of standardized formula pay programs are problematic and, because “the days of ‘I’ll scratch your back’ cronyism are long gone,” more board discretion is warranted. He even spots a trend in that direction. Continue reading

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Filed under Corporate Governance, Executive Compensation

It’s back to square one: pay CEOs with short-term incentives?

by Cydney Posner

How to structure executive pay to drive performance over the long term—while avoiding pay levels that would be considered excessive—is a conundrum for compensation committees, consultants, proxy advisory firms and others involved in setting or analyzing executive compensation. And the analysis has only become more complex since the global economic crisis of 2008, which led many to question whether the types of compensation being offered motivated the overly risky behavior that may have triggered that crisis. With that in mind, the challenge has been to structure compensation to motivate the right behaviors without inadvertently inducing overly risky activity or conduct that has the effect of boosting executive compensation irrespective of the operational success of the company. Could it be that short-term incentives are once again the answer? That’s the view of one compensation consultant.  Continue reading

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Filed under Corporate Governance, Executive Compensation

Increasing prevalence of non-GAAP measures in proxy statements

by Cydney Posner

According to the WSJ, 2016 saw the biggest gap since 2009 between non-GAAP pro forma results and GAAP results. But non-GAAP measures are not just proliferating in earnings releases, they are also proliferating in proxy statements.  The WSJ article reports that, according to Audit Analytics, the term “non-GAAP” appeared in 58% of proxies for companies in the S&P 500 compared to only 27% five years ago. And often, the article reports, the reference to “non-GAAP” meant that the CEO was awarded higher pay than would have resulted had the reference been instead to “GAAP.” Continue reading

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Filed under Executive Compensation, Securities

Is it a mistake to insist that CEO pay be performance-based?

by Cydney Posner

It goes without saying that, to many, the sine qua non of executive compensation is performance-based pay.  From proxy advisory firms to institutional holders to the drafters of Dodd-Frank, the question of whether CEO compensation is aligned with performance is a key measure of whether compensation is appropriate. As a result, often 60 to 80% of CEO pay is performance-based. But in a recent essay in the Harvard Business Review, two academics contend that performance-based pay for CEOs makes absolutely no sense: research on incentives and motivation suggests that the nature of a CEO’s work is unsuited to performance-based pay. Moreover, “performance-based pay can actually have dangerous outcomes for companies that implement it.”  Why not, they propose, pay top executives a fixed salary only? Continue reading

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Filed under Corporate Governance, Executive Compensation

Is TSR really the best performance metric?

by Cydney Posner

While TSR (total shareholder return) is increasingly used a performance metric for executive compensation, a study by Cornell University and Pearl Meyer, an executive compensation consultant, showed no real correlation to improvements in company performance, reports the WSJ.   In the study, over 48% of S&P 500 companies used TSR as performance metric in 2013, up from less than 17% in 2004. However, according to one of the study’s co-authors, “[t]here was not any conclusive evidence that the positive relationship was there.” Continue reading

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Filed under Executive Compensation, Securities