Cover image for The new standards : methods for linking business performance and executive incentive pay
The new standards : methods for linking business performance and executive incentive pay
Personal Author:
Publication Information:
Hoboken, N.J. : Wiley, c2010
Physical Description:
xv, 320 p. : ill. ; 26 cm.
General Note:
Rev. ed. of: Pay to prosper. c2004

Includes bibliographical references and index


Item Barcode
Call Number
Material Type
Item Category 1
PSZ KL 30000010293700 HF5549.5.I5 E75 2010 Open Access Book Book

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Make the most of the new standards

Every year companies spend millions of dollars on executiveincentives. All too often, however, these programs provide a veryweak link between pay and performance, with executives potentiallyrewarded as much for bad decisions as they are for good ones.

Packed with examples, The New Standards insightfullydiscusses:

How to link pay with business results that create long-termvalue

Why incentive structures can discourage management fromreasonable risk-taking, in some cases, and can enocourage imprudentrisks in others

The full range of inputs that should guide proper incentivepolicy

Why performance measures must reflect both the quality andquantity of earnings

Risk, executive behavior, and the cost of capital

How to use valuation criteria when choosing metrics

The pros and cons of common approaches to stock-based incentivepay

Written by noted compensation expert Richard Ericson, thisinnovative book is a must-read for directors and managementconcerned with executive compensation design or financialperformance measurement and forecasting. Get the guidance andconcrete solutions you need to thoroughly reexamine your executivecompensation policies and practices with the principles andfinancial maxims found in The New Standards .

Author Notes

Richard N. Ericson is an expert in executive compensation with Towers Watson. He has more than twenty-five years of experience in business valuation, performance standard setting, incentive design, and general executive pay consulting. Mr. Ericson holds an M.B.A. in finance from the University of Chicago.

Table of Contents

Chapter 1 To the CEO
Well-Designed Incentives Are Governance Defined
Old School
Act Now
You Do Not Run Your Company
The New Standards
It Is Not About You
Last Things First
Bottom Lines
Chapter 2 Business Valuation and Incentive Policy
The Rosetta Stone
Stealing the Playbook of Business Valuation
Basic DCF Model Example
Incentives and Value Creation
Value Is a Function of the Quality and Quantity of Earnings
Cost of Capital and Expected Returns
As Long as We Are At It
What Are We Paying For?
Total Business Return
DCF Model Serves as a Proxy for Other Valuation Methods
Free Cash Flow
FCF and the Irrelevance of Accounting Choices
Income and Capital: FCFs Drivers Should Be the Main Incentive Drivers
The Shape of Things to Come
Quando, Quando, Quando
The Past Is Relevant Only as Prologue
Valuation Perspective: Operational Results, Debt, and Capital Structure
Chapter 3 Market Practices in Incentive Pay
How Much Are We Paying for Management Incentives?
Variable Pay Versus Incentive Pay
Other Market-Based Considerations of Market-Based Consideration
Market Practices and Presumptions
Not Just Competitive but Fair
Chapter 4 The New Standards
Common Sense
Bias Is the Boll Weevil of Value Creation
Get Cynical
Incentivization and Its Discontents
Our Man in Springfield
The New Standards
Chapter 5 Risk, Executive Behavior, and the Cost of Capital
Risk Management Policy and Incentives
Wolves in Sheep's Clothing
Investors versus Management
Are We Granting Call Options or Put Options?
Other Variants
Seeking Equilibrium
Risk and Incentive Calibration
Incentive Policy and Risk Management
The Wages of Risk: Estimating the Cost of Capital
Beta Coefficients and the Capital Asset Pricing Model
Financial Leverage and the Cost of Capital
Other Methods and Evidence for Attaching a Cost to Capital
Chapter 6 Motive, Means, and Method:
Evaluating Incentive Performance Metrics
Role of Individual Performance in Incentive Pay
Non-Financial Goals
Evaluating Financial Metrics
Revenue, Volume, and Gross Margin
Using Valuation Criteria to Choose Metrics
Context for Evaluating Financial Metrics
Operating Income, EBIT, and Return on Invested Capital
Two Wrongs Can Make a Right
On the Importance of Being Earnest
Pre-Tax Income, Net Income, EPS, and ROE
Debt, Share Repurchases, EPS, and Stock Price Gains
Remedying Issues with Pre-tax Income, Net Income, EPS, and ROE
Cash Flow Metrics
Indexation and Immunity
Overall Perspectives
Chapter 7 Value-Based Performance Measures
Value-Based Measurement
Economic Profit or Economic Value Added
Use the Metric, Lose the Rest
Total Business Return
Shareholder Value Added
Cash Value Added
Cash Flow Return on Investment
Real Value Added
Common Values
Metric Adjustments: Compulsories Only
Risk-Based Capital Requirements and Return on Economic Capital
How Not to Choose Among Value-Based Metrics
Scope and Purpose for Value-Based Metrics
Chapter 8 Ownership, Not Gamesmanship: Setting Targets and Ranges for Performance-Based Plans
Best of Both Worlds
Tri-Fold Guide to Benchmarks
The Past Is Prologue
Not to Insult Chimpanzees
Interpreting the Oracle
Multiple Personalities
The Full Monte (Carlo)
Setting Targets Based on Total Business Return
Run Away!
Range and Domain: Setting Intervals for Performance and Pay
Games without Frontiers: Placing Limits on Performance Ranges
Weightings, Award Leverage, and Participant Influence
Incentive Risks, Calibration and Testing
Chapter 9 Business Units and Private Companies, Phantom Stock, and Performance Plans
Private Companies
Phantom Stock and Subsidiary Equity
Total Business Return Phantom Stock Plan Example
TBR Phantom Stock Grant Structure and Leverage
Dilution Guidelines and Competitive Award Levels
Valuation Approaches for the Phantom Stock Plan
Market Valuation Techniques
Discounts for Lack of Marketability and Control
Valuation Accuracy versus Incentive Efficacy
Reconciling Market Value and Formula Value
Formulas, Funding, and Fiscal Fears
Market-Indexed and Performance-Based Valuation Formulas
EBITDA as a Valuation Yardstick
Equity-Based Incentive Plans Based on Book Value
Anti-Dilution Features
Tale of Three Cities
Adjusting Valuation Results
Performance Plans
Value-Based Incentives versus Private Equity Incentives
Where the Action Is
Chapter 10 Using Stock to Create Effective Incentives
From the Top
Off to the Races
Pros and Cons of Major Approaches to Stock-Based Incentive Design
Let Them Eat Risk
Purely Stock-Based LTI Approaches
Keeping the Horses in the Barn
Granting and Leverage
Equity-Based Incentives in Venture-Stage Companies
Ownership Effects
A Whole New Ball Game
Chapter 11 The Medium Is the Message
Incentives and Financial Governance
Human Resources Perspectives