Performance Metrics and Incentive Compensation

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2 Performance Metrics and Incentive Compensation Appropriate alignment of executive compensation with company performance is a central component of overall compensation philosophy at many companies. By tying actual executive pay to achievement of specific goals, companies motivate senior employees to drive financial and strategic success. Studying the performance metrics used by peers can offer interested companies a way to better contextualize their own pay-for-performance practices and provide them with valuable information about the effectiveness of their incentive compensation plans. Main Data Group now offers a unique and powerful plan-based award metrics and pay-forperformance (P4P) tool that allows companies to compare performance using the metrics used in plan-based awards in addition to Total Shareholder Return (TSR). Our Research Our analysts collect information about how performance is measured for each plan-based award, including financial metrics, discretionary considerations and weightings where available. This high-resolution approach to SEC research provides us the information necessary to offer highly useful, specific benchmarking data. The findings presented below are based on SEC filing research for the top one thousand publicly traded U.S. companies by revenue for the most recent fiscal year. The study includes a total of 1101 current and former Chief Executive Officers. 2

3 Short-Term Cash Awards A total of 893 executives (81.1%) in the study group were granted short-term cash awards. The most commonly disclosed financial performance metrics for short-term cash awards include: - used for 280 executives (31.4%) Revenue - used for 249 executives (27.9%), and Operating income - used for 208 executives (23.3%). Board discretion and individual performance were also common design parameters in shortterm cash awards. The following graph presents the most prevalent design parameters for short-term cash awards in the study. Short-Term Cash Design Parameters Individual Performance Strategic Objectives EBITDA Revenue (Sales) Total Revenue Net Income Free Cash Flow 3

4 Long-Term Cash Awards A long-term cash award was disclosed for 129 executives in the study. The most commonly disclosed financial performance metrics utilized for this award type include: - used for 31 executives (24.0%) Relative TSR - used for 27 executives (20.9%), and Return on capital - used for 26 executives (20.2%). Board discretion was disclosed as a factor in payout of long-term cash awards by 21 of the 129 companies in the study group who offer that award type. It was a design parameter in the payout of long-term cash awards in less than half the percentage of companies as it was in the payout of short-term cash awards. The following graph presents the ten most prevalent design parameters for long-term cash awards in the study. Long-Term Cash Design Parameters Relative TSR Return on Capital Revenue (Sales) Total Revenue Strategic Objectives EBITDA Individual Performance 4

5 Performance Stock Awards Performance stock awards (including units) were disclosed for 616 executives included in the study. The most commonly disclosed financial performance metrics utilized for this award type include: Relative TSR - used for 200 executives (32.5%) - used for 157 executives (25.5%), and Return on capital - used for 68 executives (11.0%). Board discretion was a component of performance evaluation for 35 executives (5.7%) with this award type. The following graph presents the ten most prevalent design parameters for performance stock awards granted to executives in the study group. Performance Stock Design Parameters Relative TSR Return on Capital Total Revenue EBITDA Revenue (Sales) Net Income Return on Equity 5

6 Performance Option Awards Performance option awards were granted to 22 executives in the study group. The most commonly disclosed financial performance metrics utilized for this award type include: - used for 4 executives (18.2%) Stock appreciation used for 3 executives (13.6%) Revenue used for 3 executives (13.6%), and Operating income -used for 3 executives (13.6%). Board discretion was a component of performance evaluation for 2 executives (9.1%) with this award type. The following graph presents the top 5 most prevalent design parameters for performance-based option awards in the study group. Performance Option Design Parameters Stock Price Appreciation Revenue (Sales) 6

7 Performance-Accelerated Awards Performance-accelerated awards are stock or option awards granted with a time-vesting provision as well as performance measures. If achieved, performance metrics for these awards result in vesting of the award shares earlier than scheduled under the service-based condition of the grant. Out of 1101 executives in the study group, 46 executives (4.2%) were granted performance-accelerated stock. 12 executives (1.1%) were granted performance-accelerated options. The following graph presents the most prevalent design parameters used for performanceaccelerated stock awards among the study group companies. Performance-Accelerated Stock Design Parameters Stock Price Appreciation Operating Cash Flow Relative TSR Net Income Return on Capital EBITDA 7

8 The following graph presents the most prevalent design parameters used for performanceaccelerated option awards among the study group companies. Performance-Accelerated Option Metrics Stock Price Appreciation Operating Cash Flow Strategic Objectives TSR Stock Price Appreciation (Relative) Return on Equity Free Cash Flow 8

9 About Main Data Group Main Data Group is a provider of high-resolution executive compensation data. We have a robust, cloud-based platform which streamlines peer comparison work for compensation professionals. Our breadth-of-data and ease-of-use goes above and beyond any other products currently available. The information and analyses in this were developed using the Main Data Group Snapshot Data executive compensation benchmarking tool. Our analyses are based on information disclosed in SEC filings. To learn more about Snapshot Data or to request a free two-week trial, us at information@maindatagroup.com or call us at (408) x106 Main Data Group, Inc (408)