March 10, 2017
Farient believes that of all the design features of compensation, goal setting has one of the most significant effects on alignment. Goal setting is all about striking the right balance between establishing measures and setting goals that are at once motivational to executives and accretive to shareholders. Historically, most companies set goals relative to a budget that is established from an internal perspective, which we refer to as a “mark-to-budget” approach. In contrast, we believe goals also need to be set relative to standards that support stock price increases and create shareholder value over time, which we refer to as a “mark-to-shareholder” approach.
How Farient Can Help
We routinely work with our clients to sharpen their philosophies and processes around goal setting. To drive philosophical resolution, we help our clients define what constitutes good (or poor) performance – achievement against internally driven goals, externally driven benchmarks, or year-over-year improvement. We then put a fact base around all of the goal-setting inputs, including our client’s strategic and financial plans, historical and projected performance for our client and its peers, goal levels used by the peers, and shareholder expectations as indicated by analyst expectations as well as how the stock is valued. We then consider how to use the entire goal range to infuse both shareholder sensitivity and motivational value into the goal-setting system. For example, we might use the lower end of the goal range (i.e., between threshold and target) for motivational objectives and goals, and reserve the high end of the goal range (i.e., between target and maximum) for good relative and shareholder accretive performance.