The Advisors' Blog

– Broc Romanek

Here’s the highlights from FW Cook’s annual report on incentive plans:

– Profitability and revenue measures are the most commonly used financial measures among the Top 250 companies, and are also the most heavily weighted financial measures when used.

– Non-financial measures (i.e., strategic and individual performance measures) are used as discrete metrics and/or modifiers by 70% of companies with formulaic plans, but are not as heavily weighted as financial performance measures.

– Approximately one-quarter of companies with formulaic plans disclose using at least one ESG goal as part of their strategic performance measures, either as a pre-defined objective or as a consideration in arriving at the strategic performance score (excludes companies that use ESG goals as an individual performance consideration).

– Few companies using profitability and/or revenue measures disclosed setting their target goals below prior year actual performance. These companies risk criticism from proxy advisory firms and institutional investors, particularly when above-target bonuses are earned for performance that has declined year-over-year, presenting challenges for companies in cyclical industries and companies in turnaround situations.

– Companies using profit metrics utilize a wider performance range than companies using revenue metrics because revenue is typically less challenging to forecast than profitability, and therefore the range of likely outcomes is narrower. At the median, the threshold to maximum performance range is 8% below target to 9% above target for profit metrics and 5% below target to 4% above target for revenue metrics.

– Operationally, 2018 was a strong year for Top 250 companies, contributing to median CEO payouts of 128% of target.