Compensation Moneyball, Part I: The Science Behind Today’s Executive Performance Targets
Many companies continue to rely on operational metrics in their performance-based grants, preferring the higher line of sight to a market-based metric like TSR. One particularly real challenge with operational metrics is setting threshold, target, and stretch goals. And, more than ever before, compensation committees expect data-driven proof for the operational targets proposed and the corresponding payouts tied to them.
This issue brief details ways that operational targets have been set in the past. It also introduces a new technique that many organizations are adopting: “distribution fitting.” We discuss how companies are using distribution fitting to formulate supportable target, threshold, and stretch performance levels based on their own historical data and those of peer firms.
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