The Advisors' Blog

As I noted in a blog last fall, the “conventional wisdom” for executive pay is that a high percentage should be “at risk” – i.e., keyed to performance objectives. With such a large portion of executive pay coming in the form of performance awards, it’s important to get the design right. This Meridian alert outlines three best practices that compensation committees should keep in mind:

1. Choose appropriate performance metrics – Metrics need to have the right blend and degree of emphasis on advancing profitability/efficiency vs. growth. This depends on where a company is along the profitability continuum.

2. Set Appropriate Performance Goals – Performance goals – whether for short- or long-term performance incentives, generally require both quantitative and qualitative assessments. It is important to consider not just “target” but the performance range around target (threshold and maximum). The alert shares five perspectives that, in combination, should lead to sound performance goals.

3. Maintain Good Governance and Oversight Process – Process and oversight matter. The alert explains the importance of benchmarking, implementing ownership, vesting and clawback features, communicating clearly, and regularly reviewing and (if needed) adjusting to reflect changes in business strategy and conditions.

Check out the full alert for more insight on each of these points, along with the other resources in our “LTIPS/Annual Incentives” Practice Area.

– Liz Dunshee