Posts Tagged ‘executive compensation’

Evaluating executive performance – global ranking of top performing CEOs

Thursday, July 22nd, 2010

The Best-Performing CEOs in the World represents the first global ranking of the CEOs based on company performance during their tenure. Developed by INSEAD Professors Morten Hansen, Herminia Ibarra and Urs Peyer, the ranking is based on a global data set regarding 2,000 CEOs of 48 nationalities and from companies in 33 countries (INSEAD, 2010). The CEOs were chosen from the S&P Global 1200 and S&P BRIC 40 lists since 1997.

Source: INSEAD, 2010

The performance measures used for the ranking are:

  • % Industry-adjusted total shareholder return (TSR);
  • % Country-adjusted total shareholder return (TSR);
  • $ Market capitalisation.

The ranking generated some unexpected aspects, such as:

  • High-performance is fairly spread out across countries, industries and economic swings;
  • No particular context was identified to have a monopoly on exceptional performance;
  • The results indicate the importance of using objective, long-term measures to assess CEOs and to inform succession planning (Hansen, M, Ibarra, H, & Peyer, U, 2010).

References:

Hansen, M, Ibarra, H, & Peyer, U 2010, ‘The Best-Performing CEOs in the World,’ Harvard Business Review, Published January-February 2010, available at http://hbr.org/2010/01/the-best-performing-ceos-in-the-world/ar/1 (accessed 20 July 2010).

INSEAD 2010, The 200 top-performing CEOs in the world, available at http://knowledge.insead.edu/top-200-CEOs-091218.cfm (accessed 20 July 2010).

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Posted in Measure, Performance Measurement | No Comments »

Executive compensation and performance

Tuesday, July 13th, 2010

The compensation of the top executives represents an important aspect of administrative science, as it links together aspects that relate to corporate governance, human capital, organizational culture and performance management. Ideally, the executive remuneration philosophy of the organization should ensure that the remuneration properly reflects the duties and responsibilities of its executives and that remuneration is competitive in attracting, motivating and retaining people of the highest caliber.

Top executives are increasingly negotiating formal contracts that typically last 3-5 years and that specify minimum base salaries, target bonus payments, severance arrangements.

Most senior executive pay packages contain four basic elements:

  • Base Salary
  • Annual Bonus
  • Share Options
  • Long Term Incentive Plans

Additional components of pay can include:

  • Restricted Stock
  • Retirement Plans

An example of such a reward program mix is illustrated below. It contains elements specific to the industry in which the organisation operates, in this case aviation (Qantas Group, 2007):

  • Fixed Annual Remuneration (FAR)
  • The Performance Plan, comprising:
    • the Performance Cash Plan (PCP) – a short term cash incentive; and
    • the Performance Equity Plan – made up of a medium-term incentive, the Performance Share Pln (PSP) and a long-term incentive, the Performance Rights Plan (PRP);
  • Concesionary Travel Entitlements, some targeted retention arrangements and other discretionary benefits considered appropriate from time to time.

    • Source: Qantas Group, 2007

Another important issue is the retention aspect and the fact that executives have more job options than other employees. They also tend to have relatively high levels of confidence in their abilities and may be more willing to leave the organization (Bacal, 2004). The importance of motivating executives through a proper reward system in place is essential in this context.

However, common perceptions regarding executive compensation can also be surprising. In an interview with Forbes magazine (Forbes, 2010), compensation expert Robin A. Ferracone identified two characteristics of executive compensation in the 1500 S&P companies reviewed:

  • only 5% of S&P 1500 executives receive on a performance adjusted basis of over $25-100 million per year. These are considered the extremes that attract a lot of media attention.
  • only about 8% of the differences in pay are driven by performance. The size of the company and industry are bigger influencers of the CEO compensation package compared to the influence performance has.

Additional resources

The 2009 report of the Conference Board Task Force on Executive Compensation.

The smartKPIs.com library of remuneration and compensation KPIs examples.

References

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Posted in Case Study, KPI, Performance Management | No Comments »

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