Question

Discuss benefits and drawbacks of including non-financial performance criterial in executive’s compensation package.

Answer 1

Benefits-

1. It ensures that long term company objectives are aligned and taken care of. Financial evaluations are mostly short term objectives.

2. Non financial indicators give information on worth of intangible assets as well. Hence, it is important that executives work to grow that as well.

3. Future financial performance is dependent on non financial measures of today. For example, a successful customer service program or investment in R&D doesn't reap immediate benefits but future financial indicators can be improved.

Drawbacks-

1. Cost and time involved in measuring non financial performance can outweigh the benefits.

2. There is no common method of measuring non financial performance. There is no accounting rule.

3. The extent of benefit from non financial measures cannot be tracked easily and hence, pay according to it can cause frictions and objections.