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Selecting Effective Performance Metrics

Selecting Effective Performance MetricsZoom inDownload PDF

Return on invested capital (ROIC) is a complicated and often controversial performance metric for executive incentive plans. Difficult to understand and control and potentially anti-growth, ROIC and its cousins, such as return on assets, return on equity and economic profit, can be difficult to use as incentive plan metrics. If used carelessly, return-on-capital metrics can have serious unintended consequences that can be very damaging to a company’s long-term success.

Yet shareholders love ROIC as a measure of financial performance. This theme comes up over and over again in shareholder engagement conversations, at leading HR conferences and in media reports on shareholder activism. ROIC is seen as the best gauge for how effectively corporate leadership is using shareholder capital and managing investments to generate an adequate return. Many shareholders believe that ROIC is the metric of success and should be more strongly reflected in executive incentives, especially in long-term incentive plans where such metrics make the most sense.

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