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Performance Metrics Rigor Gets Renewed Focus in 2015

January 8, 2015

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Performance Metrics

As mentioned in Agenda’s recent article, ‘Comp Committees Gun for Better Pay Metrics’ by Lisa Botter:

“Executive compensation data firm Equilar’s recent Compensation and Governance Outlook Report for 2015 found that companies were focusing on metrics.

‘When setting the metrics for incentive plans, the ability for targets to be achieved has become a focal point for issuers, shareholders and proxy advisors,’ the report states. ‘In the event that the metrics are not perceived to be rigorous enough, companies can subject themselves to criticism from shareholders or proxy advisors.’”

Incentive plans are frequently designed with specific threshold, target, and maximum payouts depending on associated performance metrics. In addition, each metric often has its own threshold, target, and maximum values that determine percentage payouts. When defining the metrics for incentive plans, setting achievable targets have become a focal point for issuers, shareholders, and proxy advisors. Companies frequently disclose the rigor of selected performance metrics that are featured in both annual and long-term incentive plans. In the event that metrics are not perceived to be rigorous, companies may be further scrutinized by shareholders or proxy advisors.

Several companies address rigor in some form within the proxy statement in an effort to combat potential criticism. Increasing targets or changing companies used in performance peer groups are common ways to increase the rigor within incentive plans.