![\"\"](\"http:\/\/marchodak.com\/images\/perf_grid.jpg\" "\\"Performance")
<\/p>\nPay for performance seems like such a simple idea, and easy to accept as a basis for judging executive compensation.\u00a0 So why does it continue to create such discussion and controversy?\u00a0 Well, consider the following grid:<\/p>\n
<\/p>\n
The key distinction is managerial performance versus company performance.\u00a0 An easy way to understand this distinction is to consider a gold mining company when the gold price has dropped significantly, but our company’s profits and stock price have dropped less than half of anyone else’s in our sector due to extraordinary management.\u00a0 It’s easy to see in such an example that our management has done great, but our shareholders have done poorly.\u00a0 Should such managers get a bonus?<\/p>\n
When management and shareholder performance are strong, as in the upper right quadrant, the answer is obvious.\u00a0 When management and shareholder performance are weak, as in the lower left quadrant, the answer is obvious.<\/p>\n
But what do we do when our gold company finds itself in the upper left quadrant?\u00a0 If we pay a bonus for this situation, we are open to the accusation of pay without performance by our investors.\u00a0 Our investors might bother to look at relative performance, in which case they might forgive bonus payments up to a point.\u00a0 But there is no way outside investors can gauge what the board can, i.e., that our managers actually did a great job given their situation, and that denying them a bonus may entail a significant risk of losing them to other firms that promise to compensate them for being great managers.<\/p>\n
Paying a bonus for lower right quadrant performance is equally problematic.\u00a0 Most shareholders will let you get away with it because they are feeling flush.\u00a0 But those that don’t are on firmer ground in saying it would be pay without performance, that management was simply in the right place at the right time.\u00a0 In this situation, the downside to not paying a bonus is a little more subtle.\u00a0 If we deny managers a bonus for poor relative performance in the face of good absolute performance, then we MUST be willing to pay them bonuses for good relative performance even when the company suffers poor absolute performance.\u00a0 In other words, boards justifiably refusing to pay bonuses when they are in the lower right quadrant will eventually they find themselves in the upper left quadrant having to pay bonuses, or risk almost certain loss of their best managers.\u00a0 And we already highlighted the difficulty in adhering to a policy of consistently paying for relative, as opposed to absolute performance.<\/p>\n
True to their pragmatic form, many boards resolve this dilemma by paying for both absolute and relative performance.\u00a0 This makes the plans more complicated, and does not completely eliminate at least some criticism of pay without performance, but it at least attempts a workable compromise.\u00a0 Fortunately, ISS<\/a> (pdf) and Glass-Lewis<\/a> provide a least some cover for pay for relative performance, but that only gets you so far.<\/p>\n What would you do?<\/p>\n","protected":false},"excerpt":{"rendered":" Pay for performance seems like such a simple idea, and easy to accept as a basis for judging executive compensation.\u00a0 So why does it continue to create such discussion and controversy?\u00a0 Well, consider the following grid: The key distinction is managerial performance versus company performance.\u00a0 An easy way to understand this distinction is to consider […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5,27,10,84],"tags":[],"class_list":["post-3249","post","type-post","status-publish","format-standard","hentry","category-executive-compensation","category-governance","category-invisible-trade-offs","category-pay-for-performance"],"_links":{"self":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/3249","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/comments?post=3249"}],"version-history":[{"count":19,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/3249\/revisions"}],"predecessor-version":[{"id":3463,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/3249\/revisions\/3463"}],"wp:attachment":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/media?parent=3249"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/categories?post=3249"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/tags?post=3249"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}