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Pay for Results Mercer Digital Instant Download
Author(s): Mercer, LLC
ISBN(s): 9780470183908, 047018390X
Edition: Kindle
File Details: PDF, 2.13 MB
Year: 2009
Language: english
Pay for
Results
ALIGNING
EXECUTIVE COMPENSATION
WITH
BUSINESS PERFORMANCE
 Pay for Results

Aligning Executive Compensation

with Business Performance
 Pay for Results
Aligning Executive
Compensation with Business
Performance

Mercer

John Wiley & Sons, Inc.

Copyright © 2009 by John Wiley & Sons, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted

in any form or by any means, electronic, mechanical, photocopying, recording, scanning,
or otherwise, except as permitted under Section 107 or 108 of the 1976 United
States Copyright Act, without either the prior written permission of the Publisher,
or authorization through payment of the appropriate per-copy fee to the Copyright
Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax
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permission should be addressed to the Permissions Department, John Wiley & Sons, Inc.,
111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at
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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their
best efforts in preparing this book, they make no representations or warranties with respect
to the accuracy or completeness of the contents of this book and specifically disclaim any
implied warranties of merchantability or fitness for a particular purpose. No warranty
may be created or extended by sales representatives or written sales materials. The advice
and strategies contained herein may not be suitable for your situation.You should consult
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For general information on our other products and services, or technical support, please
contact our Customer Care Department within the United States at 800-762-2974,
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Library of Congress Cataloging-in-Publication Data:

Pay for results : aligning executive compensation with business performance / Mercer.
p. cm.
Includes index.
ISBN 978-0-470-18390-8 (cloth)
1. Executives—Salaries, etc. 2. Chief executive officers—Salaries, etc. I. Mercer (Firm)
HD4965.2.P39 2009
658.4'072—dc22
2008052081
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
 Contents

Preface ix
Acknowledgments xiii

Chapter 1 A New Day: The Call for a Demonstrable

Link between Pay and Performance 1
Executive Remuneration Governance 1
Achieving the Right Balance of Interests 7
Performance Measurement as the Key to Good
Governance 10
Change Is in the Air 10
Pay for Performance Today 12
Bringing Defensibility to Executive Remuneration 17

Chapter 2 The Million Dollar Question: What Is Good

Performance? 21
Performance as Value Creation 23
No Magic Number 27
Requirements for Effective Performance
Measurement 30

v
vi contents

Metric Selection 31
Linkage 36
Goal Setting 37
Time Horizon 38
Striking the Right Balance 41

Chapter 3 Back to Basics: An Introduction to Mercer’s

Performance Framework 43
Why Manage for Shareholder Value 44
Systems Thinking 45
Alignment of Internal and External Value
Definitions 48
Value Creation Demystified 51
Balancing Growth and Returns 52
Mercer’s Performance Measurement Framework 54
Case Study: Performance Measurement at
Manufacture Co. 60
One Size Doesn’t Fit All 63

Chapter 4 Trust, but Verify: Bringing Defensibility to

Performance Metric Selection 65
Metric Selection in a Nutshell 66
Market Research: A Limited, but Informative Tool 69
The Science of Metric Selection 71
The Art of Metric Selection 84
A Balancing Act 87

Chapter 5 Making It Count: The Case for the Unbalanced

Scorecard to Drive Behavior 89
Try, Try Again 90
From Solutions to Guiding Principles 95
Make It Motivational 96
Make It Meaningful 101
Make It Fair 105
The Future of Scorecards 107
Custom Solutions 112
 Contents vii

Chapter 6 There’s Nobody Quite Like Us: The Ins and

Outs of Meaningful Peer Comparison 115
Why Peer Groups? 116
Screening for Peers 118
Desperately Seeking Peers 125
When One’s Not Enough 129
Maintaining Peer Groups 132
Peer Groups in Practice 132
What’s Next? 134

Chapter 7 You Don’t Need a Crystal Ball: Taking the

Guesswork Out of Target Setting 137
What’s Fair? 138
Setting Performance Targets 141
Internal Target Setting 142
Externally Informed Target Setting 143
Relative Target Setting 149
Requirements of Relative Target Setting 153
No Simple Answers 155

Chapter 8 Passing the Big Test: Calibrating

Pay and Performance 157
Incentive Plan Leverage 158
Leverage and Long-Term Incentive Vehicles 162
Leverage and Goal Setting 164
Simulation Modeling 166
Maximum Award Caps 170
Assessing Plan Costs for Reasonableness 172
Passing the Big Test 174

Chapter 9 Now What? Avoid Managing by Exception 177

Designing Incentive Plans for Maximum Flexibility 179
Dealing with Unavoidable Adjustments 182
The Question of Discretion 185
Dealing with Business Change 187
Walking a Fine Line 194
viii contents

Chapter 10 More Than the Sum of Its Parts: Bringing

It All Together 195
Getting Started 197
The Implementation Road Map 207
The Benefits of a Performance Measurement
Mind-Set 211
Bringing It All Together: A Performance
Measurement Checklist 214

About the Authors 221

Index 225
 Preface

I n working with our clients at Mercer, we have emphasized the

importance of aligning pay with performance. In fact, we published
two prior books on the topic: Pay for Performance (2002) and Respon-
sible Executive Compensation (2004). So, why another book and why the
emphasis on pay for results?

Why Now?
It is no surprise to anyone who reads the newspapers that the corpo-
rate governance environment has changed dramatically, even since we
published our last book five years ago. Shareholders are demanding that
pay be commensurate with outcomes, in a way that is transparent and
tangible. In the United States and Canada, the disclosure rules for pub-
licly traded companies require that performance measures be disclosed
in most cases and that companies explain how their pay programs relate
to organizational performance.
While we have been preparing for publication, the market has con-
tinued to focus on this issue, prompted in part by the global economic
slowdown. Aligning pay with performance is no longer just important,

ix
x p re fac e

it is now essential to a responsible executive remuneration program,

and that holds true in every major region around the globe.
Woe be the company that ignores the importance of demonstrat-
ing to its stakeholders that its CEO’s remuneration is linked to com-
pany performance. Companies where pay appears disconnected from
results are roundly denounced, and their directors find themselves
subject to withhold or no vote campaigns in, for example, the United
States, or to removal in the United Kingdom and other countries that
give shareholders such a right. Regardless of where you are, decision
makers, whether board members or CEOs, may find themselves ousted
over failing to align pay with results.

Why “Results”?
As a consulting point of view, Mercer is focused on results, rather than
performance. This isn’t just a semantics change. We want to emphasize
that while you can get a pat on the back for effort (which many equate
with performance), you should get paid for delivering results—results
that over the long term deliver increased value to shareholders and
are evaluated in the context of the market and the company’s business
strategy.
Paying for results necessarily means that a one size remuneration
strategy will not fit all. Designing short- or long-term incentive plans
to align with results has to be customized to the specific organization,
whether corporate entity, business unit, or a division. Too often we see
companies migrating to “plain vanilla” measures such as total share-
holder return or earnings per share. These are end measures, they do
not reflect the drivers of long-term value nor do they communicate to
participants the company’s strategic or tactical priorities.

Why This Book?

As we observe the market and the seemingly endless string of spec-
tacular failures in the executive pay arena—option backdating, outsized
severance packages, huge sign-on or make whole payments for new
 Preface xi

hires, generous perks and benefits, and the packages associated with
the global credit crisis—we believed that boards or executives were not
adequately linking reward outcomes to sustainable performance results.
This book gives us the opportunity to reach a broader audience,
rather than one client at a time, to provide guidance based on our
experience and consulting tools on how to get the pay for results equa-
tion right. Our perspective starts with business strategy and takes into
account everything from measure selection and target setting to assess-
ing the probabilities of outcomes and how remuneration should be cal-
ibrated to ensure that the pay is commensurate with results.
Whether you are in finance, human resources, leading a business
unit or corporation, or serving on the board of directors, we believe
you will find this book a useful tool to prepare for designing new pro-
grams or refining existing ones.
 Acknowledgments

M ercer wishes to thank Jennifer Wagner and Jim Sillery for

their special contributions to Pay for Results. Jim Sillery, a
principal formerly with Mercer, works with companies in
the areas of global remuneration, executive remuneration, performance
measurement and talent management. Jennifer Wagner, an executive remu-
neration consultant and principal in Mercer’s San Francisco office, pro-
vided tremendous assistance in helping to write and publish this book
(see her biography, on page 224).

xiii
Other documents randomly have
different content
 Art - Complete Guide
Winter 2023 - Institute

Prepared by: Instructor Smith

Date: July 28, 2025

Part 1: Fundamental concepts and principles

Learning Objective 1: Problem-solving strategies and techniques
• Current trends and future directions
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Learning Objective 2: Key terms and definitions
• Learning outcomes and objectives
- Sub-point: Additional details and explanations
- Example: Practical application scenario
Learning Objective 3: Research findings and conclusions
• Fundamental concepts and principles
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Learning Objective 4: Problem-solving strategies and techniques
• Comparative analysis and synthesis
- Sub-point: Additional details and explanations
- Example: Practical application scenario
Learning Objective 5: Research findings and conclusions
• Key terms and definitions
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Formula: [Mathematical expression or equation]
Key Concept: Key terms and definitions
• Experimental procedures and results
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
[Figure 6: Diagram/Chart/Graph]
Practice Problem 6: Key terms and definitions
• Statistical analysis and interpretation
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Definition: Problem-solving strategies and techniques
• Case studies and real-world applications
- Sub-point: Additional details and explanations
- Example: Practical application scenario
[Figure 8: Diagram/Chart/Graph]
Example 8: Interdisciplinary approaches
• Critical analysis and evaluation
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Formula: [Mathematical expression or equation]
Note: Interdisciplinary approaches
• Critical analysis and evaluation
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Formula: [Mathematical expression or equation]
Methodology 2: Key terms and definitions
Example 10: Fundamental concepts and principles
• Experimental procedures and results
- Sub-point: Additional details and explanations
- Example: Practical application scenario
Example 11: Critical analysis and evaluation
• Study tips and learning strategies
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Practice Problem 12: Interdisciplinary approaches
• Best practices and recommendations
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Definition: Statistical analysis and interpretation
• Key terms and definitions
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Key Concept: Study tips and learning strategies
• Practical applications and examples
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Important: Best practices and recommendations
• Theoretical framework and methodology
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Formula: [Mathematical expression or equation]
Practice Problem 16: Learning outcomes and objectives
• Comparative analysis and synthesis
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Note: Case studies and real-world applications
• Research findings and conclusions
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Formula: [Mathematical expression or equation]
Key Concept: Literature review and discussion
• Statistical analysis and interpretation
- Sub-point: Additional details and explanations
- Example: Practical application scenario
Practice Problem 19: Current trends and future directions
• Problem-solving strategies and techniques
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Lesson 3: Learning outcomes and objectives
Practice Problem 20: Study tips and learning strategies
• Best practices and recommendations
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Important: Comparative analysis and synthesis
• Key terms and definitions
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Example 22: Key terms and definitions
• Fundamental concepts and principles
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Formula: [Mathematical expression or equation]
Remember: Case studies and real-world applications
• Theoretical framework and methodology
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Definition: Interdisciplinary approaches
• Fundamental concepts and principles
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Remember: Statistical analysis and interpretation
• Critical analysis and evaluation
- Sub-point: Additional details and explanations
- Example: Practical application scenario
Remember: Critical analysis and evaluation
• Practical applications and examples
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Example 27: Theoretical framework and methodology
• Historical development and evolution
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Example 28: Theoretical framework and methodology
• Study tips and learning strategies
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Definition: Historical development and evolution
• Assessment criteria and rubrics
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
[Figure 30: Diagram/Chart/Graph]
Part 4: Interdisciplinary approaches
Key Concept: Learning outcomes and objectives
• Statistical analysis and interpretation
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Remember: Research findings and conclusions
• Fundamental concepts and principles
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Definition: Key terms and definitions
• Experimental procedures and results
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Formula: [Mathematical expression or equation]
Definition: Comparative analysis and synthesis
• Ethical considerations and implications
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
[Figure 34: Diagram/Chart/Graph]
Example 34: Statistical analysis and interpretation
• Theoretical framework and methodology
- Sub-point: Additional details and explanations
- Example: Practical application scenario
Formula: [Mathematical expression or equation]
[Figure 35: Diagram/Chart/Graph]
Note: Historical development and evolution
• Theoretical framework and methodology
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Important: Practical applications and examples
• Case studies and real-world applications
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Important: Research findings and conclusions
• Theoretical framework and methodology
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Definition: Research findings and conclusions
• Experimental procedures and results
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Formula: [Mathematical expression or equation]
Note: Assessment criteria and rubrics
• Statistical analysis and interpretation
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Formula: [Mathematical expression or equation]
Conclusion 5: Current trends and future directions
Definition: Literature review and discussion
• Interdisciplinary approaches
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Formula: [Mathematical expression or equation]
Important: Practical applications and examples
• Experimental procedures and results
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Practice Problem 42: Interdisciplinary approaches
• Key terms and definitions
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Definition: Case studies and real-world applications
• Key terms and definitions
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Key Concept: Critical analysis and evaluation
• Best practices and recommendations
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Definition: Theoretical framework and methodology
• Key terms and definitions
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Formula: [Mathematical expression or equation]
Important: Problem-solving strategies and techniques
• Literature review and discussion
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Remember: Practical applications and examples
• Experimental procedures and results
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Remember: Historical development and evolution
• Historical development and evolution
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
[Figure 49: Diagram/Chart/Graph]
Key Concept: Current trends and future directions
• Statistical analysis and interpretation
- Sub-point: Additional details and explanations
- Example: Practical application scenario
Appendix 6: Comparative analysis and synthesis
Note: Interdisciplinary approaches
• Study tips and learning strategies
- Sub-point: Additional details and explanations
- Example: Practical application scenario
Example 51: Statistical analysis and interpretation
• Learning outcomes and objectives
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Definition: Ethical considerations and implications
• Interdisciplinary approaches
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Important: Historical development and evolution
• Problem-solving strategies and techniques
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Formula: [Mathematical expression or equation]
[Figure 54: Diagram/Chart/Graph]
Key Concept: Practical applications and examples
• Theoretical framework and methodology
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Practice Problem 55: Current trends and future directions
• Learning outcomes and objectives
- Sub-point: Additional details and explanations
- Example: Practical application scenario
[Figure 56: Diagram/Chart/Graph]
Definition: Literature review and discussion
• Ethical considerations and implications
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
[Figure 57: Diagram/Chart/Graph]
Remember: Best practices and recommendations
• Ethical considerations and implications
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Formula: [Mathematical expression or equation]
Key Concept: Practical applications and examples
• Interdisciplinary approaches
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Important: Ethical considerations and implications
• Learning outcomes and objectives
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Quiz 7: Experimental procedures and results
Note: Ethical considerations and implications
• Case studies and real-world applications
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
Formula: [Mathematical expression or equation]
Important: Statistical analysis and interpretation
• Critical analysis and evaluation
- Sub-point: Additional details and explanations
- Example: Practical application scenario
- Note: Important consideration
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