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
UK/Channel Islands regional event – 18 November 2010
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
UK/Channel Islands regional event – 18 November 2010
Performance, risk and reward aligned
UK/Channel Islands regional event – 18 November 2010
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)
UK/Channel Islands regional event – 18 November 2010
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
UK/Channel Islands regional event – 18 November 2010
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
UK/Channel Islands regional event – 18 November 2010
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:
UK/Channel Islands regional event – 18 November 2010
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:
UK/Channel Islands regional event – 18 November 2010
UK/Channel Islands regional event – 18 November 2010
39%
UK/Channel Islands regional event – 18 November 2010
UK/Channel Islands regional event – 18 November 2010
Views of a non-executive director
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
UK/Channel Islands regional event – 18 November 2010
Views of a non-executive director
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
UK/Channel Islands regional event – 18 November 2010
Thank you !