The New Standards: Methods for Linking Business Performance and Executive Incentive Pay | by Richard N. Ericson | 2010 | ISBN: 9780470559895. Market Practices in Incentive Pay. Incentive Performance Metrics. Value-Based Performance Measures.
December 5th, 2010 | by kutenk |The New Standards: Methods for Linking Business Performance and Executive Incentive Pay
by Richard N. Ericson
2010 (336 pages)
ISBN:9780470559895
Filled with market data and an abundance of how-to examples, this essential guide equips board members as well as leaders and professionals in compensation, finance, and planning with a pragmatic blueprint for incentive pay.
The New Standards—Methods for Linking Business Performance and Executive Incentive Pay
Preface
Chapter 1 – To the CEO
Overview
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
Overview
The Rosetta Stone
Stealing the Playbook of Business Valuation
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’re at It
What Are We Paying For?
Total Business Return
The DCF Model Serves as a Proxy for Other Valuation Methods
Free Cash Flow
FCF and the Irrelevance of Accounting Choices
Income and Capital: FCF’s 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
Overview
How Much Are We Paying for Management Incentives?
Variable Pay versus Incentive Pay
Mismatch Makers
Other Market-Based Considerations of Market-Based Consideration
Market Practices and Presumptions
Chapter 4 – The New Standards
Overview
Common Sense
Bias Is the Boll Weevil of Value Creation
Get Cynical
Incentivization and Its Discontents
Leading Character
Guidelines for Incentive Design
Chapter 5 – Risk and Executive Incentive Pay
Overview
Risk Management Policy and Incentives
Sheep in Wolves’ Clothing
Investors Versus Management
The Risk Trade
Risk and Incentive Calibration
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
Overview
Role of Individual Performance in Incentive Pay
Nonfinancial 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
Pretax Income, Net Income, EPS, and ROE
Debt, Share Repurchases, EPS, and Stock Price Gains
Remedying Issues with Pretax Income, Net Income, EPS, and ROE
Cash Flow Metrics
Indexation and Immunity
Overall Perspectives
Chapter 7 – Value-Based Performance Measures
Overview
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 and Business Governance
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
Overview
Best of Both Worlds
Trifold Guide to Benchmarks
The Past Is Prologue
Not to Insult Chimpanzees
Interpreting the Oracle
Multiple Personalities
Full Reconciliation to Market Value
Setting Targets Based on Total Business Return
Run Away!
Range and Domain: Setting Intervals for Performance and Pay
Weightings, Award Leverage, and Participant Influence
Incentive Risks, Calibration, and Testing
Chapter 9 – Business Units and Private Companies, Phantom Stock and Performance Plans
Overview
Private Companies
Phantom Stock and Subsidiary Equity
Phantom Stock Plan Example Using Total Business Return
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 and Funding Market Value and Formula Value
Market-Indexed and Performance-Based Valuation Formulas
EBITDA as a Valuation Yardstick
Equity-Based Incentive Plans Based on Book Value
Tale of Three Cities
Adjusting Valuation Results
Performance Plans
Value-Based Incentives versus Private Equity Incentives
Where the Rubber Hits the Road
Chapter 10 – Using Stock to Create Effective Incentives
Overview
From the Top
Off to the Races
Pros and Cons of Major Approaches to Stock-Based Incentive Design
All-In-One
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
Overview
Incentives and Financial Governance
Human Resource Perspectives
Glossary
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