Cycle-Proof Performance Measurement and Executive Bonus Plans

Abstract

This is an English translation with new additions from the German book contribution “Krisensichere Leistungsmessung und Bonuspläne” in “Turnaround - Navigation in stürmischen Zeiten: Maßnahmen zur Krisenbewältigung und Auswirkungen auf die Rollen von CFOs und Controllern” by the publishers Jürgen Weber, Hendrik Vater, Walter Schmidt and Hartmut Reinhard, Wiley-VCH, 2011, ISPN 3527505326 and ISPN 978-3527505326. It is also a revised edition of the working paper "Making Bonus Systems Fair and Crisis Proof". The paper shows how indexing performance neutralizes distortions from economic cycles and other external factors in performance measurement, making executive bonus plans both fairer and more reliable despite fat tail distributions in financial metrics. The author believes that independent indexing, such as the Obermatt Bonus Index, may support the end of the current bonus debates because executives are rewarded for what they have under control: Their performance.

Keywords: Bonus Index, indexing operating performance, indexed bonus plans, indexing, executive compensation, executive remuneration, corporate governance, incentive compensation, bonus plan, policy, pay for performance, operating index, operating alpha

JEL Classification: G34, J33, M52, J33, G31, M12, M10