Pay for performance or pay for results?

Pay for performance or pay for results?Zoom inDownload PDF

The challenge for boards: managing the balance between management impact and shareholder return.

For the last few decades, the focus of executive compensation has been to align pay with performance. Nearly every company includes “pay for performance” as a core principle of the executive compensation design, and compensation committees consider managing the pay for performance relationship as one of their primary governance responsibilities. But what exactly does “pay for performance” mean? For most companies, pay for performance has traditionally meant the following: identify key business metrics; set challenging but attainable performance objectives; and deliver pay for achieving those objectives.

In concept, this is a perfectly rational approach to executive pay. If the selected performance metrics align with the drivers of long-term value creation, then ultimately management’s pay will align with the interests of shareholders. Deliver a large portion of the pay in stock to further align the interests of executives with shareholders, and everybody wins. What could be wrong with that?

Download John Borneman’s full article, “Pay for performance or pay for results,” which first appeared in the Third Quarter 2015 issue of Directors and Boards.