The board should determine a number of relevant performance metrics and develop a compensation plan that is linked to achieving those metrics. The board should be actively engaged in setting performance goals, determining the appropriate level of stretch and assessing performance against the company’s goals. The metrics should include broad corporate financial metrics as well as individual and/or corporate measures key to managing risk. Chosen performance metrics should also reflect the key strategic goals of the business as determined by the board, capturing a range of dimensions of long-term corporate performance. Companies should disclose these larger strategic goals and explicitly show the linkage between strategy and the chosen performance metrics. Care must be taken to weight the metrics appropriately to avoid unintended payouts when the company performs poorly but meets some of the metrics. Executives, directors and shareholders must be able to clearly understand the corporate goals that management is being incented to achieve.

Examples of metrics used in performance-based compensation plans include single and multi-year financial measures (both on an absolute and on a relative peer group basis), and non-financial measures appropriate to the company, such as Environmental, Social and Governance measures, corporate sustainability measures or other specific non-financial strategic measures. Such measures should reinforce an expectation of ethical behavior within the company. Consideration should be given both to performance in the year and to metrics measured over longer periods and related to the long-term viability of the company.

Performance-based compensation should be paid only if the company actually meets or exceeds the measurable performance targets and achievement of performance targets should be a significant component in the vesting of equity awards.