The economic fallout resulting from the COVID-19 pandemic has rendered obsolete many executive incentive plans, and compensation committees are expected to apply significantly more discretion for 2020 than is typical. This Client Briefing provides a framework for the use of discretion in incentive plans. A logical framework may help companies avoid arbitrary and confusing outcomes.
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In this Client Update, we suggest that compensation committees and boards should have confidence in using their business judgment to identify key measures for evaluating company performance in incentive plans. Using reported earnings measures highlighted by Amazon.com, Inc., we provide a demonstration of how financial performance can be very closely tied to shareholder value creation over time. We also compare EVA (ISS’s latest preferred approach) to stock price over this same period. We find using Amazon’s reported financial performance to be a very strong gauge of shareholder value creation. If the Amazon example is any indication, compensation committees should feel comfortable in applying their own business judgment, rather than feeling the need to turn to ISS’s one-size-fits-all notion that EVA presides over all.
Institutional Shareholder Services (ISS) recently introduced Economic Value Added (EVA) as its latest approach to measuring company performance. Now a purveyor and proponent of EVA, ISS is marketing its product, including a recent publication, EVA, not EBITDA: A Better Measure of Investment Value. This Client Briefing examines ISS’s contention that EVA is a superior gauge of “investment value” to EBITDA.
Download the Client Briefing here (PDF).
Download information on the EVA formula we used and companies analyzed here (PDF).
When you hear the words “Monte Carlo simulation,” do you:
b) Pack your suitcase—Mediterranean vacation! (Simulation? Nah!); or
c) Ponder the link between 19th century botany and modern valuation techniques?
If you chose a) and would rather b), read this Client Briefing to c).
Monte Carlo simulations are often only marginally understood by decision makers—and trying to comprehend them makes some want to scream. But while Monte Carlo simulations are complicated, the way we explain them does not have to be. This Client Briefing offers a plain-English guide to Monte Carlo simulations, which are used to value market-based performance awards (e.g., relative TSR). The goal is to help companies understand the implications of design choices on valuation outcomes in a conversational manner.
Click here to download the Client Briefing (PDF).
Exequity's Ben Burney presented the findings of Exequity's recent study of relative TSR programs to the Chicago Chapter of The National Association of Stock Plan Professionals. The research was originally published by Exequity in a October 2017 Client Briefing.
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In this Client Briefing, Exequity explores the usage of relative total shareholder return (RTSR) within long-term incentive plans across S&P 500 companies using data from 2017 filings. We examine overall prevalence of RTSR, differences in usage between industry sectors, and key design elements of these plans.
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In this Client Briefing, we present an assessment of three pay-for-performance methodologies: Realizable, Summary Compensation Table, and ROX, Exequity’s preferred methodology. In assessing how well executive compensation and shareholder returns align under each analysis, we illuminate the key shortcomings of Realizable pay (as defined by The Conference Board) and Summary Compensation Table pay (as used by proxy advisors). Using ROX, we find that executive compensation at S&P 500 companies is very strongly aligned with returns to shareholders. We also find that Realizable pay and Summary Compensation Table pay align relatively poorly with shareholder returns, resulting in pay-for-performance “disconnects” where under ROX none may exist. ROX provides compensation committees a powerful, comprehensive, and reliable tool to illustrate the link between executive pay and performance.
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On May 23, 2008, Lynn Joy presented "The New ROX Index" which took a look at a new way to analyze the relationship between compensation and performance.
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This article by Mike Sorensen and Ross Zimmerman was published in the June/July 2007 issue of Directorship magazine. The article examines a new methodology for analyzing company performance, return on executives (ROX™). A summary table showing the ROX™ Scores for the Top 20 S&P 500 Companies in 2006 is included.
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