In Pursuit of the Perfect Performance Metric

With Management Say on Pay (MSOP) rising on the horizon, we are all faced with properly implementing a new performance paradigm.  Academic research in countries that have had MSOP for a while shows that its true impact is not changes to compensation levels or frequency.  Its single biggest impact is the broad and increasingly deeper use of performance metrics to determine pay.  This is especially true for long-term instruments such as equity awards and deferred compensation.

So, what is the perfect metric? The old adage of "stock price equals performance" will no longer fly.  There is a lot of noise these days about Total Shareholder Return (TSR), both absolute and relative. TSR is the change in stock price factoring in dividends paid. This is usually expressed as a percentage.

Proponents argue that this is the true performance that shareholders seek and that comparing one company to a group of peers (a Relative TSR plan) provides the best optic of performance in a given market.

Opponents and tepid supporters argue that there is little direct line-of-sight for most individuals.  In fact, compensation professionals at many companies who use this metric will tell you that even most senior managers are cloudy when asked how their daily or monthly work directly impacts TSR.

In a June 2010 HBR article Dan Ariely reiterated the old standard: "You Are What You Measure."  He argues that measuring performance based on stock price defines stock price as the purpose of the company.  I tend to agree.  The science seems simple.  People will do what they are told is important.  If we want them to change what they do, we need to redefine what is important.

Sometimes I think we sell our staff an ourselves short by trying to find a too-simple solution for a very complex issue.  We aim for the common denominator rather than the uncommon differentiator.  We communicate once instead of having an ongoing performance conversation.

Be prepared. As a compensation professional in this new decade you will be required to understand your business; how it performs and the risks and rewards of driving specific actions.  Over the next 60 days take the time to schedule meetings with senior managers of each critical area at your company. Get the dialogue started.  Drive the performance your company needs and you really want instead of what the trends and market data say you should pursue.

There is no silver bullet or perfect metric for all companies or all people.  Now's the time to start defining who your company is, who it wants to be and how you can use compensation to help get it there.

Dan Walter is based in San Francisco, CA and is the President and CEO of Performensation, a firm focused on improving its clients performance and equity compensation programs. He has worked with small start-ups through the Fortune 100 for more than 15 years. In addition to being a frequent speaker in the US and abroad, Dan is on the board of the National Center for Employee Ownership, helps run ShareComp, a virtual conference for the share plan industry and heads one of the largest free networking groups for equity compensation professionals, Equity Compensation Experts. Dan loves to share ideas and information. Follow him on LinkedIn or Twitter at @performensation.

Comments

[Jason Glass]

Great article Dan!

Your point that "there is no perfect metric" is particularly true in the education field. Measuring quality teaching is a very subjective concept, and valid/reliable assessments either don't exist or are not quality learning measures for so many subject ares, age ranges, and particular groups of students.

Further, it gets more complicated if you think about how to compensate a teacher, versus a principal, versus a central administrator. The purpose and goals of these positions are so very different, yet all share the desired outcome of high student achievement.

In any case, your message that we should really defining what quality performance looks like for any organization - and then strategically aligning compensation with those elements is right on target!

Just because its hard to do is no excuse for not doing it.

Jason Glass
Eagle, CO

www.stratcompworkshop.org

[Dan Walter]

Thanks for the comment Jason.

Performance-pay truly works well when you consider its holistic application. Everyone involved in the process of delivering success must be considered. Everything that is done to drive success must be looked at.

While it is not possible to drive and reward every single action, it is possible to define and manage enough actions to make a measurable impact.

I really like your last statement: "Just because it is hard to do is no excuse for not doing it."

If we avoided everything hard, we would never have crossed an ocean, flown to the moon or created a polio vaccine. Doing hard things is what separates us from the pack!