SAMPLE 1 – My revisions
The appropriate performance metrics are critical to ABC’s pay for performance philosophy. Since 2004, the performance metrics used for ABC’s annual and long-term incentive plans have been earnings per share (EPS), return on equity (ROE), and economic profit added (EPA). Using the same metrics for several years in a row maintains consistent standards for ABC employees, but the Compensation Committee analyzes these measures and their weightings regularly to ensure they remain appropriate.
As described below, each of these metrics offers a different benefit, and as a group they drive improved shareholder return and foster maximum value for ABC’s assets.
- EPS measures profitability per share. EPS growth is easily comparable to peers, and the metric is commonly used by investment analysts to communicate expectations of performance.
- ROE measures profitability relative to capital used to generate earnings, and also is easily compared to peers.
- EPA measures profit generated in excess of the cost of capital. Using this metric encourages executive officers to allocate assets to purposes most likely to generate growth and returns.
ABC’s external compensation consultants have studied these performance metrics to determine how important they are-both alone and in combination-to ABC’s mission of creating value for its shareholders. The consultants have confirmed to the Compensation Committee that EPS, ROE, and EPA are strong indicators of corporate financial performance, demonstrate value creation, and are important to the investment community.