Fortune Favors the Fittest
bar for future performance along with linking it to higher
compensation for its executives if targets are achieved.
Increased Correlation with Business Fundamentals
Correlation between executive remuneration and
underlying business fundamentals is a highly debated
conversation not just in the developing countries but
also in the developed economies of the west. In India,
this has been under significant scrutiny over the last few
years and it appears that Remuneration Committees are
becoming more aware of this issue while determining
executive pay levels.
The correlation factor for the CEO compensation
with the size of the business (revenue and turnover)
has improved from 28% last year to 40% in the current
year's analysis covering over 190 Indian CEOs. However, it
may be noted that the mathematical correlation between
executive pay in India with business fundamentals is far
lower compared to global standards - the values are less
than half the global levels. The R square factors between
compensation and revenue for the US-based CEOs are
0.60 on Total Annual Compensation and 0.75 on Total
Compensation including long-term incentives. The
following table provides a broad analysis of these correlation
factors (compensation costs with revenue size) seen in India
and the US for certain critical positions across key sectors:
Mathematical correlation between
executive pay in India with
business fundamentals is far lower
compared to global standards.
Increase in correlation factors signifies an increased
linkage between the compensation levels and the
underlying business fundamentals and also shows greater
alignment with performance.
Measuring Executive Performance
We have talked about an increased prevalence of performance
to pay relationship, but what would it take to measure the
executive performance? The Aon Hewitt study captures and
closely analyses the performance metrics for executives. The
following table shows the categorisation of performance
anchors into financial and non-financial measures. The higher
financial measure linkages are seen for the CEO as well as the
business heads, while non-financial measures tend to be more
important for functional positions.
CEO/CXO Scorecard: Weightages of Performance Metrics (n = 102)
The performance measures are in principle similar to
those seen for larger developed economies with financial
measures being focused around profitability, revenue,
and cash flow measures along with strategic initiatives.
Non-financial measures are typically around service,
quality, customer and employee-related matters.
Despite differences expected in the way performance
might be evaluated in different businesses of different
sizes, the study couldn't identify any specific trends based
on sector, ownership or size. The broader buckets for
measuring performance remained similar to the overall
trends noted by us above.
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