Make the most of the new standards Every year companies spend millions of dollars on executive incentives. All too often, however, these programs provide a very weak link between pay and performance, with executives potentially rewarded as much for bad decisions as they are for good ones. Packed with examples, The New Standards insightfully discusses: * How to link pay with business results that create long-term value * Why incentive structures can discourage management from reasonable risk-taking, in some cases, and can enocourage imprudent risks in others * The full range of inputs that…mehr
Make the most of the new standards Every year companies spend millions of dollars on executive incentives. All too often, however, these programs provide a very weak link between pay and performance, with executives potentially rewarded as much for bad decisions as they are for good ones. Packed with examples, The New Standards insightfully discusses: * How to link pay with business results that create long-term value * Why incentive structures can discourage management from reasonable risk-taking, in some cases, and can enocourage imprudent risks in others * The full range of inputs that should guide proper incentive policy * Why performance measures must reflect both the quality and quantity of earnings * Risk, executive behavior, and the cost of capital * How to use valuation criteria when choosing metrics * The pros and cons of common approaches to stock-based incentive pay Written by noted compensation expert Richard Ericson, this innovative book is a must-read for directors and management concerned with executive compensation design or financial performance measurement and forecasting. Get the guidance and concrete solutions you need to thoroughly reexamine your executive compensation policies and practices with the principles and financial maxims found in The New Standards.Hinweis: Dieser Artikel kann nur an eine deutsche Lieferadresse ausgeliefert werden.
Richard N. Ericson is an expert in executive compensation with Towers Watson. He has more than twenty-five years of experience in business valuation, performance standard setting, incentive design, and general executive pay consulting. Mr. Ericson holds an M.B.A. in finance from the University of Chicago.
Inhaltsangabe
Preface ix Acknowledgements xv Chapter 1 To the CEO 1 Well-Designed Incentives Are Governance Defined 3 Old School 6 Act Now 7 You Do Not Run Your Company 9 The New Standards 10 It Is Not about You 14 Last Things First 16 Bottom Lines 17 Chapter 2 Business Valuation and Incentive Policy 19 The Rosetta Stone 20 Stealing the Playbook of Business Valuation 21 Incentives and Value Creation 25 Value is a Function of the Quality and Quantity of Earnings 28 Cost of Capital and Expected Returns 30 As Long as We're at it 32 What Are We Paying For? 34 Total Business Return 37 The DCF Model Serves as a Proxy for Other Valuation Methods 40 Free Cash flow 43 FCF and the Irrelevance of Accounting Choices 45 Income and Capital: FCF's Drivers Should Be the Main Incentive Drivers 46 The Shape of Things to Come 47 Quando, Quando, Quando 49 The Past is Relevant Only as Prologue 50 Valuation Perspective: Operational Results, Debt, and Capital Structure 52 Chapter 3 Market Practices in Incentive Pay 59 How Much Are We Paying for Management Incentives? 64 Variable Pay versus Incentive Pay 67 Mismatch Makers 74 Other Market-Based Considerations of Market-Based Consideration 75 Market Practices and Presumptions 77 Chapter 4 The New Standards 83 Common Sense 91 Bias is the Boil Weevil of Value Creation 92 Get Cynical 93 Incentivization and its Discontents 95 Leading Chartcter 97 Guidelines for Incentive Design 99 Chapter 5 Risk and Executive Incentive Pay 107 Risk Management Policy and Incentives 108 Sheep in Wolves' Clothing 113 Investors versus Management 113 The Risk Trade 115 Risk and Incentive Calibration 119 The Wages of risk: Estimating the Cost of Capital 121 Beta Coefficients and the Capital Asset Pricing Model 121 Financial Leverage and the Cost of Capital 123 Other Methods and Evidence for Attaching a Cost to Capital 125 Chapter 6 Motive, Means, and Method: Evaluating Incentive Performance Metrics 131 Role of Individual Performance in Incentive Pay 132 Nonfinancial Goals 133 Evaluating Financial Metrics 137 Revenue, Volume, and Gross Margin 138 Using Valuation Criteria to Choose Metrics 141 Context for Evaluating Financial Metrics 142 Operating Income, EBIT, and Return on Invested Capital 143 Two Wrongs Can Make a Right 146 On the Importance of Being Earnest 149 Pretax Income, Net Income, EPS, and ROE 149 Debt, Share Repurchases, EPS, and Stock Price Gains 150 Remedying Issues with Pretax Income, Net Income, EPS, and ROE 154 Cash flow Metrics 155 Indexation and Immunity 158 Overall Perspectives 160 Chapter 7 Value-Based Performance Measures 163 Value-Based Measurement 165 Economic Profit or Economic Value Added 167 Use the Metric, Lose the Rest 169 Total Business Return 170 Shareholder Value Added 174 Cash Value Added 174 Cash Flow Return on Investment 175 Real Value Added 177 Common Values 179 Metric Adjustments and Business Governance 180 Metric Adjustments: Compulsories Only 185 Risk-Based Capital Requirements and Return on Economic Capital 188 How Not to choose Among Value-Based Metrics 191 Chapter 8 Ownership, Not Gamesmanship: Setting Targets and Ranges for Performance-Based Plans 195 Best of Both Worlds 196 Trifold guide to Benchmarks 197 The Past is Prologue 198 Not to Insult Chimpanzees 203 Interpreting the Oracle 205 Multiple Personalities 206 Full Reconciliation to Market Value 209 Setting Targets Based on Total Business Return 215 Run Away! 219 Range and Domain: setting Intervals for Performance and Pay 222 Weightings, Award Leverage, and Participant Influence 227 Incentive Risks, Calibration, and Testing 228 Chapter 9 Business Units and Private Companies, Phantom Stock and Performance Plans 231 Private Companies 233 Phantom Stock and Subsidiary Equity 234 Phantom Stock Plan Example Using Total Business Return 235 TBR Phantom Stock Grant Structure and Leverage 239 Dilution Guidelines and Competitive Award Levels 241 Valuation Approaches for the Phantom Stock Plan 242 Market Valuation Techniques 243 Discounts for Lack of Marketability and Control 244 Valuation Accuracy versus Incentive Efficacy 245 Reconciling and Funding Market Value and Formula Value 246 Market-Indexed and Performance-Based Valuation formulas 248 EBITDA as a Valuation Yardstick 251 Equity-Based Incentive Plans Based on Book Value 252 Tale of Three Cities 252 Adjusting Valuation Results 253 Performance Plans 254 Value-Based Incentives versus Private Equity Incentives 259 Where the Rubber Hits the Road 262 Chapter 10 Using Stock to Create Effective Incentives 265 From the Top 266 Off to the Races 269 Pros and Cons of Major Approaches to Stock-Based Incentive Design 271 All-In-One 273 Let Them Eat Risk 275 Purely Stock-Based LTI Approaches 278 Keeping the Horses in the Barn 280 Granting and Leverage 282 Equity-Based Incentives in Venture-Stage Companies 284 Ownership Effects 287 A Whole New Ball Game 287 Chapter 11 The Medium Is the Message 289 Incentive and Financial Governance 290 Human Resource Perspectives 293 Glossary 301 Index 305
Preface ix Acknowledgements xv Chapter 1 To the CEO 1 Well-Designed Incentives Are Governance Defined 3 Old School 6 Act Now 7 You Do Not Run Your Company 9 The New Standards 10 It Is Not about You 14 Last Things First 16 Bottom Lines 17 Chapter 2 Business Valuation and Incentive Policy 19 The Rosetta Stone 20 Stealing the Playbook of Business Valuation 21 Incentives and Value Creation 25 Value is a Function of the Quality and Quantity of Earnings 28 Cost of Capital and Expected Returns 30 As Long as We're at it 32 What Are We Paying For? 34 Total Business Return 37 The DCF Model Serves as a Proxy for Other Valuation Methods 40 Free Cash flow 43 FCF and the Irrelevance of Accounting Choices 45 Income and Capital: FCF's Drivers Should Be the Main Incentive Drivers 46 The Shape of Things to Come 47 Quando, Quando, Quando 49 The Past is Relevant Only as Prologue 50 Valuation Perspective: Operational Results, Debt, and Capital Structure 52 Chapter 3 Market Practices in Incentive Pay 59 How Much Are We Paying for Management Incentives? 64 Variable Pay versus Incentive Pay 67 Mismatch Makers 74 Other Market-Based Considerations of Market-Based Consideration 75 Market Practices and Presumptions 77 Chapter 4 The New Standards 83 Common Sense 91 Bias is the Boil Weevil of Value Creation 92 Get Cynical 93 Incentivization and its Discontents 95 Leading Chartcter 97 Guidelines for Incentive Design 99 Chapter 5 Risk and Executive Incentive Pay 107 Risk Management Policy and Incentives 108 Sheep in Wolves' Clothing 113 Investors versus Management 113 The Risk Trade 115 Risk and Incentive Calibration 119 The Wages of risk: Estimating the Cost of Capital 121 Beta Coefficients and the Capital Asset Pricing Model 121 Financial Leverage and the Cost of Capital 123 Other Methods and Evidence for Attaching a Cost to Capital 125 Chapter 6 Motive, Means, and Method: Evaluating Incentive Performance Metrics 131 Role of Individual Performance in Incentive Pay 132 Nonfinancial Goals 133 Evaluating Financial Metrics 137 Revenue, Volume, and Gross Margin 138 Using Valuation Criteria to Choose Metrics 141 Context for Evaluating Financial Metrics 142 Operating Income, EBIT, and Return on Invested Capital 143 Two Wrongs Can Make a Right 146 On the Importance of Being Earnest 149 Pretax Income, Net Income, EPS, and ROE 149 Debt, Share Repurchases, EPS, and Stock Price Gains 150 Remedying Issues with Pretax Income, Net Income, EPS, and ROE 154 Cash flow Metrics 155 Indexation and Immunity 158 Overall Perspectives 160 Chapter 7 Value-Based Performance Measures 163 Value-Based Measurement 165 Economic Profit or Economic Value Added 167 Use the Metric, Lose the Rest 169 Total Business Return 170 Shareholder Value Added 174 Cash Value Added 174 Cash Flow Return on Investment 175 Real Value Added 177 Common Values 179 Metric Adjustments and Business Governance 180 Metric Adjustments: Compulsories Only 185 Risk-Based Capital Requirements and Return on Economic Capital 188 How Not to choose Among Value-Based Metrics 191 Chapter 8 Ownership, Not Gamesmanship: Setting Targets and Ranges for Performance-Based Plans 195 Best of Both Worlds 196 Trifold guide to Benchmarks 197 The Past is Prologue 198 Not to Insult Chimpanzees 203 Interpreting the Oracle 205 Multiple Personalities 206 Full Reconciliation to Market Value 209 Setting Targets Based on Total Business Return 215 Run Away! 219 Range and Domain: setting Intervals for Performance and Pay 222 Weightings, Award Leverage, and Participant Influence 227 Incentive Risks, Calibration, and Testing 228 Chapter 9 Business Units and Private Companies, Phantom Stock and Performance Plans 231 Private Companies 233 Phantom Stock and Subsidiary Equity 234 Phantom Stock Plan Example Using Total Business Return 235 TBR Phantom Stock Grant Structure and Leverage 239 Dilution Guidelines and Competitive Award Levels 241 Valuation Approaches for the Phantom Stock Plan 242 Market Valuation Techniques 243 Discounts for Lack of Marketability and Control 244 Valuation Accuracy versus Incentive Efficacy 245 Reconciling and Funding Market Value and Formula Value 246 Market-Indexed and Performance-Based Valuation formulas 248 EBITDA as a Valuation Yardstick 251 Equity-Based Incentive Plans Based on Book Value 252 Tale of Three Cities 252 Adjusting Valuation Results 253 Performance Plans 254 Value-Based Incentives versus Private Equity Incentives 259 Where the Rubber Hits the Road 262 Chapter 10 Using Stock to Create Effective Incentives 265 From the Top 266 Off to the Races 269 Pros and Cons of Major Approaches to Stock-Based Incentive Design 271 All-In-One 273 Let Them Eat Risk 275 Purely Stock-Based LTI Approaches 278 Keeping the Horses in the Barn 280 Granting and Leverage 282 Equity-Based Incentives in Venture-Stage Companies 284 Ownership Effects 287 A Whole New Ball Game 287 Chapter 11 The Medium Is the Message 289 Incentive and Financial Governance 290 Human Resource Perspectives 293 Glossary 301 Index 305
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