“Pay for performance” is a topic du jour in corporate boardrooms. Not that anyone is questioning whether companies should recognize and reward superior performance; rather, the debate is how to do it.

Goaded by proxy advisory firms, public companies have adopted formulas for executive compensation that are largely based on financial metrics and total shareholder return (TSR). We may now be seeing an emerging trend toward less adherence to a strictly formulaic approach and more room for boards to make discretionary judgments, which used to be more the norm.

In theory, a formula makes a lot of sense: A company establishes targets for quantitative metrics that drive shareholder value – such as revenue, earnings per share, return on capital or free cash flow – and then objectively computes executive compensation based on the results achieved against those targets. Read More