Editor’s note: This is part of the 2010 NRN and HVS salary study, “Just rewards,” from the Nov. 22 issue of Nation’s Restaurant News. To see the full report, available to subscribers only, go to NRN.com’s Special Reports page. Excerpts, including this case study and data on the most underpaid and overpaid CEOs, as well as the methodology behind the study, are available to all NRN.com readers.
The HVS pay-for-performance model incorporates standard business indicators to quantify the performance of a given chief executive relative to his or her peers. The simplified formula is:
HVS Value Index = (M + S + E ) / C
The Market Complexity Factor, or M, quantifies the complexity differential of running a large-cap versus a small-cap company. It is calculated by comparing the market capitalization of the subject company to the average market capitalization of the peer group.
The Stock Appreciation Factor, or S, measures stock appreciation and is calculated by comparing the stock appreciation of the subject company to the average stock appreciation of the peer group over a given period of time.
The EBITDA Growth Factor, or E, measures EBITDA growth. It is calculated by comparing the EBITDA growth of the subject company to the average EBITDA growth of the peer group over a given period of time.
The Compensation Benchmark, or C, quantifies the degree to which a chief executive over- or under-earns his peer group. Compensation includes base salary, short-term incentives, long-term incentives and other compensation as required to be disclosed by SEC regulations. Stock options are valued using the Black-Scholes valuation model, which takes into account price variation over time. C is calculated by comparing the total compensation of the subject executive with the average total compensation of the peer group.
Each component is variously weighted to maintain consistency. Certain outliers are excluded, and a normal distribution function is applied, indexed with 100.0 as average. Variations of the model can be used for single assets, non-public entities and non-profits. n
HVS Executive Search is a division of Mineola, N.Y.-based HVS, a fully integrated consulting firm focused on the hospitality industry with 30 offices worldwide.