Individual Performance Metrics: Discretionary Adjustment or Pay Flexibility?

Metric selection in an Annual Incentive Program (AIP) gives company directors the opportunity to tailor compensation plans to the specific circumstances of the company’s named executive officers (NEOs). Often this decision revolves around competing goals as the compensation plan is expected to compensate NEOs for the opportunity cost of their time, reward exceptional performance, retain talented individuals, and incentivize high effort and productivity. While a well-designed Annual Incentive Plan considers all of these factors, shareholders generally prefer AIPs that display a clear relationship between shareholder value creation and executive pay.