Executive target-setting and linking it to incentive systems proves to be a complex process. Moreover, boards are under increasing pressure to use a balanced set of(strategic) performance metrics and to look beyond financial indicators. Key performance indicators (KPIs) are defined as critical indicators demonstrating a company’s progress towards its key business objectives.
The challenge many boards and companies are facing is two-fold.
On the one hand, there is an increased focus on the use of non-financial performance metrics to be included as a driver in executive incentive systems.
On the other hand, companies are also having difficulties finding the right set of financial KPIs. They often tend to use easy-to-measure data, while the real challenge is to find the more critical KPIs, taking into account shareholder structures, business cycles, level in organisational hierarchy, while also being aware of the drawbacks caused by at least some financial KPIs.
Together with corporate partner Deloitte, Professor Xavier Baeten and researcher Marthe Van Hove at Vlerick’s Executive Remuneration Research Centre has developed this paper in order to inspire practitioners looking for the ‘right’ financial and non-financial KPIs, underlying both short-term incentives and long-term incentives. This paper provides a taxonomy of different indicators that can be used.
The objective of our paper is not to prescribe by providing the ultimate set of KPIs –which would be ‘mission impossible’, as this is highly dependent on each firm’s specific situation. Rather, the objective is to take a broad and non-prescribing perspective by providing an encompassing overview and inventory of performance metrics used in executive remuneration. As such, the paper offers a guide to improving the choice of key performance indicators. Of course, KPIs need to be deduced from the firm’s strategy and the objectives the firm wants to achieve.