Much has been written about the current economic downturn in general and its implications for the alignment of corporate pay and performance in particular. Indeed, the task of selecting performance measures and calibrating performance targets has never been more critical – or challenging. For this reason, it should come as no surprise that shareholders have started to take an increasingly active interest in how companies manage these issues to ensure total compensation levels remain reasonable, risk is shared and business results sit atop the agenda. What has been surprising, however, is the paucity of tangible, practical ideas on how companies should meet these challenges in a way that appropriately balances the interests of all stakeholders.

It is Mercer’s view that companies must be rigorous in these tasks to an extent that they may have aspired to in the past but not always achieved. Part of that demands that companies have the right analytical tools available to them to give the information and perspective they need on how to define performance, set targets and calibrate pay with performance. While the best tools often rely on historical data, they should not be discounted out of hand simply because conventional logic suggests that “unprecedented” times have rendered historical precedents meaningless. Rather, companies should continue to look to past performance to gain insights about their businesses and their competitors. Of course, in light of all that has happened, these insights should also be coupled with innovative thinking, sound judgement and stakeholder consultation if companies intend to put effective processes in place and ensure pay for results.

This Perspective highlights some of the best analytical tools at companies’ disposal as well as some other considerations that should be central to their performance measurement and calibration processes.