Crisis-proof and reliable compensation
with incentives for investment and growth.
Executive compensation during crises is a major challenge. External market forces create more work for management, but variable payouts rarely reflect this. With Obermatt's indexed performance measurement, payouts become more reliable and incentive plans more motivating, in every business cycle.
Compensation systems you can rely on
Management deserves compensation that is reliable and reflects their performance. Shareholders want performance clarity and motivation for growth. However, compensation systems often unknowingly carry high risks for extreme payouts, either far too much or far too little. The effort required to set fixed compensation targets is also high, especially in a market environment that is constantly changing.
The risk of ending up in an extreme situation, paying no variable compensation or having to pay maximum bonuses, is surprisingly high, as shown by the outer bars in the diagrams below. The probability of zero payout (first bar) was nearly 22% in the analyzed case, a significant risk for employee retention and motivation. At the same time, the risk of a maximum payout was nearly 20%, potentially a reputational risk and certainly the cause of higher future expectations that are difficult to meet (last bar). The ideal bars in the desired range, where more performance leads to more pay, are unfortunately small (left chart). This analysis was conducted for a large industrial company. For non-cyclical companies such as consumer goods, the result is nearly the same. For smaller companies, the results can be even riskier.
Compare the payout probabilities of this typical compensation plan with those of the Obermatt rank method. On the same data, the probability of payouts in the desired range is around 75%, against less than 30% with the index method.
When Obermatt improves performance measurement by indexing metrics against a customized peer universe or implementing a Triple Bottom Line approach, the risk of undesirable payouts decreases while the probability of desired payouts increases. This enables companies to meet the reliability and transparency demanded by shareholders and enjoy broader acceptance of compensation, both internally and externally.
When a company outperforms others, its employees deserve to earn more too.
Balancing governance interests
Listed companies face major challenges when it comes to executive compensation, especially in uncertain and turbulent economic times. Compensation systems should align the interests of executives with those of shareholders, but market volatility and external pressure make this process more difficult. Selecting realistic and effective performance targets, managing shareholder expectations and retaining top talent is becoming increasingly challenging. The solution is transparent and reliable: indexed performance measurement.
Balancing compensation, performance and shareholder expectations
Setting realistic compensation targets for executives in an uncertain market is difficult. When performance metrics decline due to external factors beyond management's control, such as inflation, political uncertainty or supply chain disruptions, the compensation committee faces a dilemma. Cutting executive pay in line with poor results could demotivate key personnel. Yet paying high bonuses while simultaneously laying off employees or making losses will draw criticism from shareholders, proxy advisors and the public. The transparency and legitimacy of compensation plans is therefore becoming ever more important.
Retaining executives
In uncertain markets, compensation packages can suddenly drop unexpectedly, reducing the probability of falling within the appropriate payout range. This creates the risk of losing top talent or having to justify high payouts to proxy advisors and the public.
Bridging the gap between family owners and executives
To remain competitive, companies must attract and retain the best talent. At the same time, the company's actual market position must be made transparent. Setting targets and thus measuring performance becomes increasingly difficult in uncertain times. Nevertheless, compensation should be reliable and reward long-term growth, not just short-term profit maximization.
Attracting and retaining top talent
A crisis-proof LTIP (Long-Term Incentive Plan) is an important instrument for attracting and retaining the best talent in the market. It provides reliable, performance-based payouts even in uncertain times, which is of critical importance for family-owned businesses. Market comparisons become possible, providing greater performance clarity.
Driving performance and growth
The indexed Obermatt LTIP compensation plan creates both performance clarity and decisive growth incentives within the company. The LTIP Index helps overcome the challenge of missing share prices and is the key to building and consolidating market leadership.
The market leader on your side
Obermatt has been introducing financial performance indicators into compensation since 2001, serving approximately 52% of Swiss companies that use indexed performance measurement. While too many companies still limit their long-standing compensation plans to share price returns, Obermatt has experience with all forms of quantitative performance indicators, published in award-winning books and dozens of articles, enabling its clients to design more reliable compensation. As a client, you receive the Triple Bottom Line analysis as a basis for ESG compensation. Obermatt guides the selection of financial and ESG performance indicators, target-setting for each metric, calibration of the compensation function and creates the documentation for the compensation regulations. This applies to annual compensation, STI (Short-term Incentive) as well as multi-year plans, LTI (Long-term Incentive).
To help you increase the relevance of strategic, non-financial performance indicators (ESG) in your company, we offer to analyze your situation free of charge. You will receive a written assessment of your compensation system with a strengths and weaknesses analysis. CEO Dr. Hermann Stern presents his analysis results to you and other decision-makers in your organization in a personal dialogue, going into depth and answering your questions.
Ready for better performance measurement?
Let us shape your performance story together.
