Tools and Methodologies
June 13, 2016
Compensation remains center stage for all stakeholders. However, there is often confusion about what pay for performance means, and how to align executive interests with shareholder interests. To provide a framework for both corporations and shareholders, Farient continues to make significant investments in proprietary methodologies and thought leadership that are changing the way stakeholders look at pay for performance alignment and executive compensation disclosures.
Farient’s Shareholder Value Engagement Tool
Farient’s Shareholder value analysis™ is a tool that highlights how sensitive total shareholder return (TSR) is to additional performance measures. For example, how does total shareholder return (TSR) move with earnings before interest, tax, depreciation and amortization (EBITDA), or with Return on Invested Capital (ROIC)? Seeing this relationship for any array of potential measures, or multiple measures, provides our clients an indication of what measures they should be considering in their short-term or long-term incentive plans. Our clients appreciate the rigor Farient brings to this choice.
Farient’s Quantitative Risk Assessor™
In light of the increasing focus on this area by boards of directors, Farient developed a proprietary Quantitative Risk Assessor™ that helps compensation committees answer:
- How much risk are we taking on?
- Is it appropriate?
- Does our compensation program encourage appropriate risk-taking relative to the business risk?
- Do we want to change our business risk appetite?
- What corresponding changes to the compensation program may be necessary?
Farient’s Quantitative Risk Assessor works by first evaluating the risk inherent in a client’s business by comparing the company’s growth, size, financial leverage, volatility, capital intensity and other risk indicators to the Russell 3000 to determine the long-term risk profile of the business. We then quantify the total direct compensation package in terms of leverage, upside potential, performance measures, goals, time horizon and other risk indicators to assess the compensation system’s effect on risk-taking. Finally, we compare the business risk to the compensation risk to highlight any areas that should be “on watch,” and suggest any changes that should be considered.
Farient’s Performance Alignment Reports™ (PARS)™
Farient supplies a means to quantify and visually illustrate the degree to which a company’s executive compensation program is aligned with total shareholder return over time. Based on extensive research and analysis, our Performance Alignment models provide the best “pure” pay for performance analysis. Additionally, our Farient Forecaster™ projects the future of company’s pay plan to understand potential outcomes. As a result of this precision, our models are relied upon by leading investors, boards of directors and management teams around the world.