Benchmarking for Executive Incentive Pay: The Importance of Performance Standards

Large amounts of executive compensation hinge on pre-set performance goals. This heightens the level of precision and confidence needed when companies and their boards address the key tasks of incentive design, testing, calibration and administration. Compensation committees often spend a great deal of time making sure they have proper market benchmarks for the level of executive pay. But business performance standards often have a large impact on executive compensation, and should receive significant attention from the committee. This article reviews the relative importance of performance standards and sets out a range of methods that can be used to set and manage them.