PP4P Payment Program, Objectives Of Performance Pay For Performance

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Recommended: The advantages and disadvantages of Performance Related Pay

PP4P compensation plan
Before describing perfect pay for performance, objectives of performance pay must be clarified. Objectives include incentives for value creation for shareholders, provide reasonable pay when there is crisis and minimize remuneration cost without sacrificing the above two conditions. The author listed two traditional performance pay method before World WarⅡ, Carnegie and Sloan. Carnegie performance pay method gives management the right to buy shares at book value and pay future dividend. This method provides executives far more than current stock, but it requires consistent capital gain and high shareholders’ control of the company. Nowadays it is often used in professional partnerships. Sloan method gives more employees the contribution-related bonus, but …show more content…

But few companies are found actually using this formula. Actually, pay leverage 0.8 is closer to partnership pay and the human resources shows a leverage of 0.4 is because bonus and equity fill the gap. Furthermore, according to David McLaughlin, pay component has changed during the past twenty-five years. In 1990s, pay for performance has become strategic and have different kinds of long-term related pay method. Another change in 1990s is that remuneration for executives were closely tied to stock grant.

The author then precisely describes three similar perfect pay for performance methods. PP4Ps are different from other payment method. Firstly, PP4Ps create direct relationship between management pay and performance. Secondly, management should earn market-average for normal performance. Thirdly, the ratio between pay and performance must be fixed and positive. The author then introduces his own PP4P plan. The number of shares granted should equals to target compensation divided by the stock price at the end of the year. The vesting percentage of shares should equals to 1/ (1 + post-grant industry TSR). Then adjustments are made to market compensations. One is to make expected future

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