Executive Compensation – Establishing KPIs

Person operating a calculator

By Suzanne Hanifin

Today, executive compensation packages are heavily weighted toward salary and bonuses.  As Executive Recruiters, we are often asked, “how do we set up a fair bonus structure?”

The current consensus seems to be a bonus structure based upon 50% company wellbeing and 50% on personal goals or Key Performance Indicators (KPIs) is fair to both the company and the employee. A KPI is an established goal that is quantifiable and measurable over time and adds value here because it provides a concrete basis for evaluation of performance. KPIs should help operations define and examine not only their successes, but how you define the actionable steps needed to obtain those successes. 

Establishing KPIs is a straightforward process, and the best ones aren’t overly complex. We are often asked, in the context of bonuses, “What are the best metrics for a CEO and Leadership Teams?” To answer that question, first answer this question: “What are the company’s goals and what do we hope to accomplish with this new hire?” Once you have identified your goals and the potential impact the new hire might have, the last question that needs to be answered is do you have the capabilities to establish benchmarks in place to measure the KPIs.

The most common KPIs we are seeing today:

  1. Return on Equity (ROE) – We still measure a company’s success on EBITA, Gross Margins, and Profitability, but more companies are talking about ROE – including privately held companies.  By looking at ROE, it takes into consideration the different profitability margins between products and services, delivering the best ROI on both financials and personnel resources.  It also brings in “Goodwill” and other activities that bring awareness to your brand.
  2. Recruiting & Retention – Leaders in your organization are responsible for setting tone and what is acceptable behavior. Culture is from the top down! One of the best ways we have seen it measured is by using a Net Promotor Score.
    • Net Promoter Score is used to understand and predict the long-term health of your business. A simple customer (internal employees and external customers) survey is one way to obtain your baseline. It is a way to understand how your customers and employees feel about your products or services and how eager they are to share it with others. The more “promoters” you have, the more successful your business will be. If you have “detractors”, understand why and then build out ways of improving the score.  Measuring the differences is the key.
  3. KPIs for other leaders and direct reports – Most CEOs are bonused on their direct reports hitting their individual targets and goals.  Working across the organization, here are the top measurements we are seeing:
    • Marketing and Sales: Cost per Lead (CPL); Marketing Qualified Leads (MQL); Customer Retention; Cost per Customer Acquisition; Marketing ROI; and Revenues
    • Accounting and Finance: Operating cash flow; Current Ration; Net profit Margin; Gross Profit Margin; Working capital; Budget Variance; Team Recruiting/Retention
    • Operations: Labor Utilization; Turnover Rate; Labor Materials; Operating Margins; Training; Customer Lifetime Value; Processes/Procedures Development/ Improvements; Cash Flow

This is a broad overview of establishing KPIs for your leadership team. Part of Acumen Executive Search’s value proposition to our client companies, is our expertise in consulting for successful outcomes, laying a solid foundation for success. We find great leaders and structure a win-win outcome that reaps reward over time. Please reach out to the team at Acumen for expert guidance before and after your critical hiring needs, and further assistance on establishing executive compensation or key performance indicators.