kpis, performance & reward - global equity

UK/Channel Islands regional event – 18 November 2010

KPIs, Performance & Reward

- topics, trends and developments- views of a non-executive director

Paula Kager – Director at PwC Human Resource Services

Dirk Lindenbergh – Supervisor Board member of DOCdata N.V.

GEO Local Chapter Meeting

on 10 December 2010

http://www.docdata.com/e-shop.des/page,website.landing/func,select_language/lang,nl


Topics to be addressed today

Performance, risk and reward aligned

The challenge of strategy and KPI alignment

Key challenges for Dutch listed companies

Developing practices in the Netherlands: performance measures

The basics of scenario modelling

Scenario modelling case study DOCdata

Views of a non-executive director


Performance, risk and reward aligned


The challenge of strategy and KPI alignment

STRATEGY

BONUSKPIs

CORPORATEKPIs

14%

39%

88%?25%!

FTSE 350 Corporate Reportingresearch findings:

Only 39% of companies clearlylink bonus KPIs to strategic objectives

88% explicitly identify their KPIsbut only 25% clearly align corporateKPIs and strategic priorities

Only 14% of KPIs reported byFTSE 350 companies at a corporatelevel were clearly aligned with thosedisclosed for bonus purposes

This diagram shows the proportion ofFTSE 350 companies that align theirstrategy, remuneration KPIs andcorporate KPIs (PwC UK, 2009 reports)


Key challenges for Dutch listed companies

1. Align strategic objectives with remuneration KPIs:

• strategic alignment of performance, risk and reward

2. Apply stakeholder model:

• Shareholders and other stakeholders

• Financial and non-financial performance

3. Get governance right:

• Ensure pay for performance

• Use of discretionary authority / clawback

4. Disclosure and reporting


Developing practices in the Netherlands:performance measures

Performance criteria linked to

incentives are still predominantly

financial, but there is a clear trend

towards the introduction of non-

financial performance measures

This year 16 out of the 22 AEX-

companies reviewed (73%) have

used a mix of financial and non-

financial performance

measures; the weight varies from

80/20 to 50/50

Non-financial performance measures:

• Strategic progress, strategic milestones

• Operational effectiveness, projectdelivery, product launch

• Risk management, compliance

• Employee engagement

• Customer satisfaction

• Sustainability (environmental, social,governance)

• Example of ‘other’ financialperformance measure: successfulrefinancing, emission, acquisition


The basics of scenario modelling

• to simulate scenarios of expected future performance based onrecent performance;

• for target setting purposes based on an assessment of theprobability of vesting of performance shares;

• to determine the right ‘performance incentive zone’, i.e.design of vesting vs performance schedule;

• to monitor the value of the outstanding awards and theprobability of payout at vesting;

• to decide upon adjustment of the number of shares vesting;

• that is required under the Dutch Corporate Governance Code.

Financial modelling is used as a tool:


Scenario modelling case study DOCdata

• Average annual share price growth

• Share price volatility

• Dividend yield

• Risk free interest rate

• Fair value as per date of award

Performance Share Plan

Performance target TSR

3-year vesting period

Award 25% x annual base

salary (CEO) / 15% (CFO)

Assumptions applied for scenario

modelling analysis:



39%




Failures in rewarding incentives I have come across since 2000:

• Volume in trading of shares used for incentive schemes

• Sentiment in the market

• References to the share price

• Change of control / ownership in an acquisition

• Allowing the management board to reward their direct reports

• Ultimum remedium

• Personal targets

• Actual versus budgeted results

• Impact of IFRS



How to avoid and/or repair failures?

• Renegotiate the package

• Perform a market / peer group analysis

• Do a robust scenario analysis

• Get your performance & pay grid right

• Reward exceptional (incremental) performance far above target

• Reward extraordinary achievements (turnaround, complex transitions

during a specific period)

• Use your discretionary power where appropriate


Thank you !


kpis, performance & reward - global equity

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