The Advisors' Blog

– Lynn Jokela

This recent blog from Foley & Lardner lists 10 considerations for management and compensation committees when establishing performance awards.  The blog includes considerations to keep in mind when selecting performance goals as well as when adopting or modifying a clawback policy.  One consideration to keep in mind is that if you’re agonizing over what the “right” performance goal is, you can select more than one and don’t need to settle on a single goal.  Here’s an excerpt:

Typically, long-term incentive compensation programs use more than one performance goal, including at least one earnings metric (such as Net Income, EBITDA, or net operating profit) and one return metric (such as ROIC, EPS, or TSR).  Therefore, companies shouldn’t agonize to figure out the “one right goal” or feel like they should have their executive team focused on only a single outcome.   If more than one goal is selected, use their weighting (e.g., achievement of goal #1 results in 70% of the award being earned and achievement of goal #2 results in 30% of the award being earned) to reflect their importance to the company’s overall business strategy.