Pay for performance puts more cash in executives’ pockets while improving a firm’s balance sheets, a new study shows.
Organizations that make some part of compensation dependent on individual performance, perform better than others, and increase the pool of money available for compensation — this means employees get paid more, too, explained Eric Cousineau, an HR consultant with Johnston Smith International and author of the study, The Relationship between Executive Pay & Corporate Performance. The study is based on the Toronto Board of Trade’s 2001 compensation survey.
Rather than examining connections between overall company performance and compensation, Cousineau looked at how more specific performance measures affect compensation.
For example, in companies where CEO pay is linked to performance goals like ROE (return on equity) or EBITDA, (earnings before interest, taxes, depreciation and amortization), the CEO took home an average of 66 per cent more than peers in organizations that do not use performance measures.
Companies need to reward results and not efforts, explained Cousineau. Employee performance goals must be aligned with corporate goals and just emphasizing effort does not produce alignment, he said. This still happens fairly regularly, he said, “More often than one would care to see. The issue is that companies don’t naturally think about results on things like projects and really what is most important is not the fact that you got something done, what is more important is how well did you do it.”
It is also important for organizations to measure the things that will ensure the long-term success of the organization. By focusing on short-term targets or share price you may not be doing the right things over the long term, he said.
Although the effect of corporate performance measurement programs is greatest for CEOs, the study also showed considerable increases at other levels. For example, top-level executives earned 44 per cent more, top regional executives earned 52 per cent more, and executive vice-presidents made 47 per cent more. As for human resources, top HR executives in organizations that use performance measures, earned an average of $142,086 compared to $118,649 in firms that don’t have performance measures.
Not surprisingly, publicly traded companies use more formal performance measures than public-sector organizations and non-profits. Less expected was the finding that retail and wholesale trade companies make the greatest use of performance measurement programs, said Cousineau.
And among larger organizations, corporate performance measures are fairly similar at the highest levels. This finding echoes one from another recent study in the United States which found there is a great deal of similarity in executive incentive plan design. One size should not fit all when it comes to pay for performance programs, said Doug Friske, an executive compensation specialist with Towers Perrin. Executive bonus programs need to be highly customized to get the best value for the program and provide a competitive advantage.
The Towers Perrin survey of 237 American companies found that:
•More than 60 per cent of respondents use three or more measures to determine bonus payouts. Earning per share is the most commonly used measure (34 per cent), followed by revenue measures (25 per cent), measures of net income or profit (22 per cent) and finally earnings before interest and taxes or EBIT (14 per cent).
•More than half have adopted individual performance measures to determine awards and the most frequently used were customer satisfaction, employee satisfaction, quality and new product development.
Organizations that make some part of compensation dependent on individual performance, perform better than others, and increase the pool of money available for compensation — this means employees get paid more, too, explained Eric Cousineau, an HR consultant with Johnston Smith International and author of the study, The Relationship between Executive Pay & Corporate Performance. The study is based on the Toronto Board of Trade’s 2001 compensation survey.
Rather than examining connections between overall company performance and compensation, Cousineau looked at how more specific performance measures affect compensation.
For example, in companies where CEO pay is linked to performance goals like ROE (return on equity) or EBITDA, (earnings before interest, taxes, depreciation and amortization), the CEO took home an average of 66 per cent more than peers in organizations that do not use performance measures.
Companies need to reward results and not efforts, explained Cousineau. Employee performance goals must be aligned with corporate goals and just emphasizing effort does not produce alignment, he said. This still happens fairly regularly, he said, “More often than one would care to see. The issue is that companies don’t naturally think about results on things like projects and really what is most important is not the fact that you got something done, what is more important is how well did you do it.”
It is also important for organizations to measure the things that will ensure the long-term success of the organization. By focusing on short-term targets or share price you may not be doing the right things over the long term, he said.
Although the effect of corporate performance measurement programs is greatest for CEOs, the study also showed considerable increases at other levels. For example, top-level executives earned 44 per cent more, top regional executives earned 52 per cent more, and executive vice-presidents made 47 per cent more. As for human resources, top HR executives in organizations that use performance measures, earned an average of $142,086 compared to $118,649 in firms that don’t have performance measures.
Not surprisingly, publicly traded companies use more formal performance measures than public-sector organizations and non-profits. Less expected was the finding that retail and wholesale trade companies make the greatest use of performance measurement programs, said Cousineau.
And among larger organizations, corporate performance measures are fairly similar at the highest levels. This finding echoes one from another recent study in the United States which found there is a great deal of similarity in executive incentive plan design. One size should not fit all when it comes to pay for performance programs, said Doug Friske, an executive compensation specialist with Towers Perrin. Executive bonus programs need to be highly customized to get the best value for the program and provide a competitive advantage.
The Towers Perrin survey of 237 American companies found that:
•More than 60 per cent of respondents use three or more measures to determine bonus payouts. Earning per share is the most commonly used measure (34 per cent), followed by revenue measures (25 per cent), measures of net income or profit (22 per cent) and finally earnings before interest and taxes or EBIT (14 per cent).
•More than half have adopted individual performance measures to determine awards and the most frequently used were customer satisfaction, employee satisfaction, quality and new product development.
