SUMMARY:

The article "Compensation Comp Targets That Work," written by Radhakrishnan Gopalan,
John Horn, and Todd T. Milbourn and published in the Harvard Business Review in 2017,
addresses the common challenges companies face when establishing executive performance
targets. It also offers four fundamental principles for crafting compensation structures that
foster long-term value creation.
Traditional performance targets, as the article highlights, often fall short in promoting the
long-term health and success of organizations. They tend to incentivize executives to
prioritize short-term financial gains, sometimes even leading to unethical practices or
financial manipulation. This scenario is further complicated by the fact that many companies
change their CEO's performance metrics frequently, causing disruption and uncertainty.
To overcome these issues, the authors propose four core principles:
1. Use Multiple Metrics: The authors advocate for the use of multiple performance
metrics instead of relying on a single one. By incorporating various metrics like
earnings per share, return on assets, and customer satisfaction, companies can create a
more balanced and comprehensive evaluation of performance. This approach
discourages managers from fixating on a single metric to the detriment of other
critical aspects of the business.
2. Increase Payouts at a Constant Rate: Conventional compensation structures often
offer higher bonuses for larger performance improvements. This, however, can lead to
excessive risk-taking and even manipulation. The authors suggest a fixed bonus rate,
irrespective of the size of the performance increase. For example, a consistent 10% of
salary bonus for any performance increase above a certain threshold. This approach
reduces the incentive for managers to game the system for larger payouts.
3. Reward Relative Performance: Instead of focusing solely on meeting absolute
targets, the article recommends rewarding executives for outperforming their
competitors or achieving relative targets. This aligns executive interests with the
broader interests of the company. For instance, a company could offer a bonus of 10%
of salary if the organization beats its competitors in terms of revenue growth. This
incentivizes executives to concentrate on improving the company's performance
relative to its peers.
4. Include Nonfinancial Targets: Many traditional performance targets primarily
revolve around financial metrics, potentially leading to decisions that favor short-term
gains but harm the company's long-term well-being. The authors argue for the
inclusion of nonfinancial targets like customer satisfaction, employee engagement,
and environmental impact in performance metrics. This approach ensures a more
holistic evaluation and encourages decisions that benefit the overall health and
sustainability of the company.
In conclusion, the authors stress that implementing these four principles in compensation
structures can create performance targets that are more resistant to manipulation and are
better poised to drive long-term value creation. Such an approach aligns executive interests
with the company's overall health, promotes sustainability, and discourages short-term
thinking and unethical practices.

ISSUES IN THE CASE:

The article "Compensation Comp Targets That Work" highlights several critical issues related
to traditional executive performance targets, which often fall short in promoting a company's
long-term health and success. Here are the issues outlined in the case in more detail:
1. Frequent Changes in CEO Performance Metrics: One of the primary issues raised
in the article is that companies frequently change their CEOs' performance metrics.
The case mentions that almost all of the 1,000 largest U.S. firms underwent complete
changes in their CEOs' performance metrics at least once between 2006 and 2014, and
nearly 60% made multiple changes. This frequent alteration of performance targets
can lead to instability and uncertainty in executive compensation, making it
challenging for CEOs to focus on consistent, long-term value creation.
2. Short-Term Focus and Unethical Practices: Traditional performance targets often
incentivize short-term thinking among executives. The pursuit of immediate financial
gains can lead to unethical practices or even financial manipulation. In their quest to
meet or exceed these targets, some executives may engage in actions that might be
detrimental to the company's long-term prospects, such as cutting essential
investments in research and development (R&D) or sacrificing product quality.
3. Manipulation of Numbers: The use of single performance metrics in traditional
compensation structures makes it easier for executives to manipulate numbers to
achieve their targets. Executives might resort to creative accounting or other
questionable practices, distorting the true financial health and performance of the
company. This manipulation can ultimately misrepresent the company's status to
investors and stakeholders.
4. Excessive Risk-Taking: Conventional compensation structures often offer higher
bonuses for larger increases in performance. This approach can encourage executives
to take on excessive risks to meet their targets. They may engage in risky business
strategies or financial maneuvers that, while potentially profitable in the short term,
can jeopardize the company's stability and long-term sustainability.
5. Misalignment of Executive and Organizational Interests: Traditional performance
targets primarily focus on executives meeting absolute financial targets. This narrow
approach can lead executives to prioritize their own performance and financial gain
over the broader interests of the organization. Executives may make decisions that
benefit themselves personally but do not necessarily contribute to the company's
overall health and prosperity.
6. Neglect of Nonfinancial Factors: Traditional performance metrics often concentrate
on financial indicators like earnings and revenue. This exclusive focus on financial
outcomes may lead executives to overlook nonfinancial factors that are equally
crucial to the organization's success, such as customer satisfaction, employee
 engagement, and environmental impact. Neglecting these nonfinancial aspects can be
detrimental to the long-term reputation and sustainability of the company.
These issues collectively highlight the limitations of traditional executive compensation
structures and the need for a more holistic and balanced approach to setting performance
targets. The article proposes four key principles to address these challenges and promote
more effective, ethical, and sustainable executive compensation practices.

RECOMMENDATIONS:
Use Multiple Metrics: Incorporate a Balanced Mix of Financial and Nonfinancial
Metrics
• To create a more comprehensive evaluation of executive performance, incorporate a
mix of financial and nonfinancial metrics in executive targets. Balance financial
metrics like earnings per share and return on assets with nonfinancial metrics such as
customer satisfaction and employee engagement. This approach encourages a holistic
view of performance and discourages overreliance on a single metric.
Increase Payouts at a Constant Rate: Implement Fixed Bonus Rates for Consistency
• Encourage consistent and ethical pursuit of performance targets by implementing
fixed bonus rates for executives, regardless of the scale of their performance
improvements. This approach mitigates the incentive for executives to take excessive
risks or manipulate results for larger payouts.
Reward Relative Performance: Align Compensation with External Benchmarks
• Promote competitive alignment by rewarding executives for outperforming
competitors and meeting relative performance targets. This approach ensures that
executive interests are closely aligned with external benchmarks and market
conditions, fostering the organization's competitive advantage.
Include Nonfinancial Targets in Performance Metrics: Encourage Broader Impact
Consideration
• Integrate nonfinancial targets like customer satisfaction, employee engagement, and
environmental impact into performance metrics. By including these broader impact
metrics, executives are motivated to consider the social and environmental
consequences of their decisions, fostering corporate responsibility and long-term
sustainability.
Transparency in Performance Targets: Ensure Clear Communication
• Maintain a high level of transparency by clearly communicating performance targets
to both executives and shareholders. Open communication fosters understanding and
reduces the risk of manipulation, promoting trust and accountability within the
organization.
Regularly Review Performance Targets: Periodically Assess and Update
 • Periodically review and update performance targets to ensure they remain aligned
with the company's strategic objectives. Regular reviews prevent targets from
becoming outdated and irrelevant, keeping them challenging yet attainable in dynamic
business environments.
Provide Ongoing Feedback: Foster Consistent and Constructive Feedback
• Offer consistent and constructive feedback to executives on their progress toward
meeting performance targets. Ongoing feedback keeps executives focused on their
objectives and facilitates the early identification and resolution of potential
performance issues.
By implementing these strategies, companies can develop a more equitable and balanced
performance management system that prioritizes long-term value creation while fostering
ethical conduct, transparency, and accountability.