Post Meeting Notes: Financial Performance Measures: Their Use in Incentive Plans

As a follow-up to the excellent introductory session on Measuring Financial Performance with Alex Edmans in July, this meeting examined in detail the use of such measures in both annual and longer-term incentive plans.

Having considered what is meant by corporate (and management) performance – from the perspective of different stakeholders – this turns to the complex task facing the Remuneration Committee of how to link performance to an appropriate level of reward.

In this session, Tom Gosling shares his learnings as a former reward consultant to major international companies and complemented by the broader range of responsible business issues in his current role at the LBS Centre for Corporate Governance, for whom he has just completed an academic survey paper on how boards and investors set CEO pay. Tom’s views were challenged in discussion with guest speakers representing RemCo and investor perspectives, namely Aston Business School’s George Feiger and Portfolio NED and RemCo Chair Alan Giles.

Examples of the critical areas covered include:

• The different types of financial measure – and how they align with value
• The problems of looking at individual measures in isolation
• The relevance of different measures for either short-term or long-term plans, including those measures that show stronger correlation with long-term share price
• The extent to which measures are subject to management control, and the tension between alignment with inputs vs alignment with shareholder value
• Treatment of complex adjustments such as impairment charges
• Selecting appropriate comparator peer groups
• Discretion – when, why, and how boards should over-ride formulaic outcomes

In the aftermath of the Covid pandemic, the scrutiny placed on corporate performance and justifiable reward is probably higher than it has ever been. RemCo chairs are keenly aware of the need to drive performance improvement, while balancing the interests and sensitivities of multiple stakeholders. Being seen to ‘do the right thing’, and setting the right performance measures and targets looms large on the Board agenda.

Catch up with these post meeting notes for a comprehensive summary of the meeting.