by Kim S. Nash

Measuring CIO Performance: The Rise and Fall of Compensation

Aug 30, 20123 mins

CIO compensation may be based on whether the company hits its goals for return on assets or other financial metrics. Here's a look at what goes into the equation.

The financial metrics that CIOs and fellow senior executives strive to meet measure corporate health, not specific IT achievements. That suits “mature professionals” just fine, says Wayne Shurts, CIO of Supervalu, a $36.1 billion grocery chain.

“Some years [your compensation] may get pulled down by the company’s overall performance and other years you may get pulled up,” he says. “What’s important is that everybody is focused on the company’s performance, not their individual function.” (See also “CIO Pay Tied to Overall Business Success.”

Wal-Mart was criticized this year for lowering targets for some performance metrics, making them easier to hit and, as a result, making it easier for executives to earn large bonuses. Shareholders expressed concern that the company now emphasizes sales growth at the expense of return on investment.

Wal-Mart countered that its metrics and compensation plan works. “Our incentive compensation programs provide appropriate incentives to our senior executives to manage the company in a manner that will help us achieve our strategic priorities of growth, leverage, and returns, and, therefore, maximize shareholder value,” the company said in its latest proxy statement.

Performance metrics can be highly political, says Vincent Milich, a compensation consultant at Hay Group. “There is considerable scrutiny of executive compensation. The compensation committee can adjust targets.”

Sometimes boards of directors create a specialized composite metric, combining several measures. For example, railway company Norfolk Southern last year tied part of the compensation of senior officers to a composite of adherence to its operating plan, train performance and connection performance.

Other common metrics include the following:

Return on Invested Capital (ROIC): Operating income divided by shareholders’ equity plus long-term debt. Home Depot measures ROIC over three years and surpassed its target for 2011.

Book Value per Share: Shareholders’ equity divided by the total number of shares outstanding. Allstate surpassed the minimum level the board set for this metric last year.

Operating Ratio: Operating expenses divided by operating revenue. Norfolk Southern improved its operating ratio last year, contributing to executive bonuses.

Return on Equity: Net profits divided by an average of shareholders’ equity over a specified period. Last year, MetLife and Ameriprise Financial exceeded their return-on-equity goals.

Return on Assets: Net profits plus interest expense divided by average assets over a period of time. SunTrust Banks last year replaced return on equity with return on assets as a corporate metric because it says the asset measurement better reflects company performance and profitability.