There's perhaps nothing more challenging to boards than ensuring the right measures are being used. As noted, performance measures are critical to tracking effectiveness of the strategy and its implementation, and motivating and fairly rewarding the chief executive and management team. Being central to these fundamental board responsibilities, performance measures can be viewed as the essential glue that holds these governance elements together.
Against a backdrop of long and loud shareholder cries for boards to pay for performance, directors are working diligently to get to the right measures. But it's not easy, and many boards continue to struggle toward that goal. Directors are also challenged in determining how best to comply with performance-related disclosure requirements of the new Dodd-Frank law and SEC regulations.
There's substance in the oft-used phrase, “you get what you measure.” Measure the wrong things, and results can be disastrous. Measure the right ones—aligned with the strategic plan and related business objectives cascading to business units throughout an organization—and managers are motivated and work together toward achieving corporate goals.
As with most governance issues, one size does not fit all, and performance measurement certainly is no exception. So, each board must determine how best to achieve its measurement objectives. With that said, experience shows that the approaches outlined here serve boards well.
It's All about Linkage ...