Performance metrics are objectives that an employer specifies will be the basis of incentive compensation rewards. The theory is that rewards drive employee behavior on the job. Companies trying to design payment for executives are often concerned with these metrics, as are executives and their attorneys, when negotiating executive compensation packages. There are a wide range of metrics that may be used to provide rewards to executives who meet specific goals. As an executive, it is crucial to retain an experienced New York City executive compensation attorney during the negotiation of an employment agreement to make sure that the performance metrics and the incentives to which they are tied are fair.The Role of Performance Metrics
Companies and corporations face pressure to align pay with executive performance. Strong employment agreements for executives will include the length of the employment term, the title, the job obligations and responsibilities, the compensation package, and benefits. Often, compensation includes bonuses and commissions, and there may be 401(k) matching or other pension plans available as benefits. Senior executives' employment agreements are likely to include equity compensation arrangements, such as stock options, deferred compensation, restricted stock, and supplemental retirement benefits. Sometimes base salary is non-negotiable, even for an executive, but there may be more wiggle room with regard to variable compensation in the forms of short- and long-term incentives.
Often, executives receive variable pay based on performance metrics. Incentive plans become an important tool whereby companies reward effective management over the short term and the long term. Different strategies are used by companies to establish an executive's performance goals. Performance metrics can be absolute or relative, financial or non-financial, and strategic or operational. They may be based on the quality of the work, the quantity of the work, and the efficiency of the work. On the other hand, they may be based on the performance of the organization as a whole.
Generally, financial metrics are based on a company's profit, revenue growth, or return on investment. Market metrics turn on a company's stock price, often relative to total shareholder return. This metric is considered to be one of the best indicators aligning executive compensation with a shareholder's interests. However, not all companies use this metric as their only metric.
One principle of executive compensation is “line of sight.” This principle involves trying to establish goals that are reasonably controlled by an executive. Low line of sight can result in goals shifting based on factors outside the executive's control, such that a large degree of luck is involved, and there is less incentive to act in particular ways. Certain tax reforms can affect incentive plans by reducing the line of sight.
Performance metrics related to incentive compensation can differ significantly across industries. Usually, it is important to negotiate for a combination of short- and long-term incentives, based on performance metrics that make sense for both sides. It can be important to discuss performance metrics with an experienced employment attorney during the negotiation of an executive employment agreement. An employment lawyer can provide advice on the fairness of an offer, based on industry standards. An attorney also can ensure that the payments comply with tax and executive compensation regulations to avoid clawbacks and penalties.
There are also certain issues of discrimination that may arise when proper performance metrics are not in place. When an employer has more discretion, there may be a greater likelihood, for example, of gender discrimination, even among executives. It has been shown that women in professional and managerial occupations experience greater gender pay differences than people in working class jobs, and one source of this seems to be incentive pay.Explore Your Options with an Executive Compensation Attorney in New York City
If you are a New York executive who wants to know more about the use of performance metrics in the workplace, you should consult an employment attorney. You can contact Phillips & Associates at (212) 248-7431 or complete our online form for a free consultation. We handle employment litigation in the Bronx, Queens, Brooklyn, Staten Island, and Manhattan; the Counties of Westchester, Nassau, and Suffolk; as well as Princeton, New Jersey, and Philadelphia, Pennsylvania.
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