SAMPLE 1 – Original
Performance Metrics
Selecting the appropriate performance metrics is another important element of ABC’s pay for performance philosophy. Annually, we analyze the relationship of the performance measures and the weighting used in the annual and long-term incentive plans to enhance shareholder value. Since 2004, the performance metrics in both plans have been earnings per share (EPS), return on equity (ROE) and economic profit added (EPA). Each of these metrics has different benefits. Earning per share measures profitability per share and EPS Growth is easily comparable to peers and commonly used by investment analysts to communicate expectations of performance. Return on Equity measures profitability relative to capital used to generate earnings and is also easily compared to peers. Economic Profit Added measures profit generated in excess of the cost of capital and is designed to balance growth and returns and focus ABC’s executive officers on the allocation of finite capital. ABC’s external compensation consultants have performed regression analyses on each of the performance metrics with measures of value such as total return to shareholders and market-to-book multiples. Each metric is looked at in isolation and in combination. The consultants have confirmed that the metrics provide a strong line of sight to corporate financial performance, correlate well to value creation, and are important to the investment community. Their findings are reviewed with the compensation committee for concurrence and approval. We have selected these factors to drive improved shareholder return and enterprise value to total capital utilization and maintain consistency year over year in performance metrics for ABC employees.
