Do Nonfinancial Measures Have To Be Soft?

In a recent Harvard Business Review article, Graham Kenny posits that nonfinancial measures should be included alongside financial measures in incentive plans. He goes on to say that this is leading companies to use both hard and soft performance measures—where ‘soft’ measures can be more subjective in nature. We wholeheartedly agree with the premise—so much so that we wonder if Kenny goes far enough, particularly where subjectivity is concerned. For many, however, the element of subjectivity in this context implies an arbitrary assessment of performance against goals, based on the general sense of the board’s compensation committee. This interpretation rightly makes institutional investors and other investors uneasy. But, does this really need to be the case, especially given the abundance of data in today’s digital age?

We think there are ways to structure subjectivity such that the compensation committee’s performance assessments and incentive determinations make sense against the backdrop of company performance. Moreover, by bringing a clear structure and hard information to the more subjective elements of the incentive system, performance assessments and incentive determinations become more explainable, more powerful internally, and more defensible externally.

Read the rest of the article on the NACD blog.