The calibration of performance targets – how the target levels are set for long-terms incentives or LTIs – has a decisive impact on the incentivization of executives and other staff. This harbors both risks and opportunities for companies. Set the targets too low and the LTI system will be uneconomical. Set them too high and their power as incentives will be undermined; indeed they may even be counterproductive, putting the company's long-term performance in danger.

It is important that companies get this right. Setting challenging yet achievable targets is a key success factor. If the company manages to achieve the correct relationship between performance and level of target achievement, it will have created a carefully balanced risk profile with the shared objective of the long-term success of the company firmly at his heart.

Calibration is fundamental part of developing a detailed LTI system. It involves four steps:

  • First, define the required performance for 100% target achievement
  • Next, set the minimum and maximum payouts – i.e. a floor and a cap
  • Having established this framework, define the overall functional connection between performance and level of target achievement
  • Finally, carry out backward and forward testing to determine the likelihood of payout

hkp/// group offers complete support for companies, based on our technical expertise and extensive project experience in calibrating LTI systems. We work with firms of all types and sizes, ensuring that the principles of appropriateness and balance are translated into specific performance parameters at every decision-making level.

Author Regine Siepmann

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