Performance Metrics and Their Link to Value
July 18, 2016
Executive Compensation White Paper
One clear outcome from say-on-pay voting on executive compensation has been a focus on pay for performance. Farient Advisors has already analyzed how companies are defining pay (see our study “Pay Definitions: What Works Best in Pay for Performance Analysis”). Now we must focus on the “performance” side of the equation and ask:
Are companies choosing performance metrics that provide the most sustainable benefit to their shareholders?
According to a new study from Farient and the State Board of Administration of Florida, some industries demonstrate a clear alignment between the metrics most frequently used in long-term incentive (LTI) equity plans and shareholder value. Half of the 24 industry groups show solid to strong alignment in that the metrics they use most often are also those that best correlate to value. The other half could benefit from some improvement.
This groundbreaking research covers 1,800 companies, 24 industry groups, and fourteen years of data (from 1998 to 2011). It identifies the primary metrics used in executive compensation plans, overall and by industry, company size, and valuation premiums, and then tests these metrics to determine whether those being used have the highest impact on TSR results. It provides the most definitive answer to date on whether companies are choosing their LTI metrics wisely for the most sustainable benefit to shareholders.