Creative approach to performance measurement and pay plan design
How Farient changed the game
Farient was engaged by the Compensation Committee of the Board of this Fortune 1000 manufacturing company to develop a new compensation strategy and short- and long-term incentive plans geared to their global growth strategy.
The Challenge
The client was in a highly volatile and cyclical industry and had many concerns including: (1) the company routinely performed outside of (either above or below) its incentive goal ranges; (2) a significant portion of performance was not in management’s control; and (3) the Compensation Committee of the Board often found itself questioning whether it should override the plan with discretionary actions.
Farient’ s Approach
Farient developed a sector-specific peer group, as well as a more targeted set of peers, and tested this group to empirically determine how company financial performance translated into market value over time. After discussing a number of design and measurement alternatives with the Compensation Committee and management, Farient recommended growth in Total Business Return (TBR) as the primary measure of performance, whereby TBR was determined based on a formula that translated financial performance into market value. In addition, we developed goal ranges for our client by calculating the TBR of all companies in the sector-specific peer group, and using the 25th, 50th, and 75th percentile return levels for the goal range. Finally, we put a more subjective measure in the short-term plan, based largely upon the extent to which our client out-performed or under-performed the industry.
The Results
This plan was not only motivational to executives, but also provided a powerful association with corporate strategy, and gave the Compensation Committee of the Board high confidence that they were paying the right amount for the performance delivered.
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