Credit for the redesign goes to Michelle, 100%. I just showed up at the last minute.

But I’m from Planet Lawyer, so I always ask whether, when people put something in writing, they mean what they say and say what they mean. I felt the Cosi setup I posted about didn’t meet either test, because (and here’s where we differ) I think it’s quite easy for the board to justify an override here – in fact, if the year has gone reasonably well but they stick to their guns and give him zero shares, that might seem like an imprudent, perhaps disincentivizing gesture. The structure they’ve set up is like a New Year’s resolution you’re highly unlikely to keep, e.g, swearing you won’t eat a single crumb of sugar for the entire year, instead of setting a more modest and achievable goal like limiting your intake of hot fudge sundaes to one per quarter. If you sincerely want to avoid all sugar, you’d better have someone lock you up for the year and throw away the key. I think this metaphor is getting away from me, but I hope you see what I mean.

Before all of this enhanced disclosure, companies with “metrics-based approaches” *typically* had built-in, undisclosed safety values; e.g., if the plan was 50% payout for $X EPS and 100% payout for 2X, but the Board could still retroactively adjust the target (e.g., to exclude Division XYZ that met with unforseen, uncontrollable disaster). And, it must be understood, this is not in all cases investor unfriendly. Especially when referring to 3-5 year LTIs, for most companies, calibrating precise targets is difficult/impossible.

And, on the other hand, i wouldn’t dismiss out of hand the incentivizing nature of the above plan. When the Board says to the CEO, your plan is hit this bogey for your stock payout, miss it and the plan calls for nothing, 80% of the “incentive” happened in that discussion. Unless the Board is constituted with insiders, they know they will have to defend discretionary overrides. I just think as an investor, you might prefer this discretionary override (importantly, assuming governance is otherwise healthy) to a concrete plan that handcuffs them without any ability to adjust for new information along the way. (I spent eight years as a Consultant installing metrics- based plans – the reality is that few investors want 100% metrics without discretion– the academics who push this tend to underestimate executive motivations and overestimate the feasibility of calibrating targets. Not to mention that argument against quant goals in the first place; halfway thru the year the Board may decide some new strategic initiative is critical but it will require investment that kills the target). Sorry for length, i hope that is interesting…David

But this plan has an abrupt hurdle, so if he comes up 95% on the metrics (which don’t appear to me to be mathish, rather financially specific which is good, link to adjusted CFO looks good), technically he gets a goose egg. So the discretion is supposed to give the Board a little leeway, so they can dole out something. Investors/board, they do like tight metrics, but only to a point, because they know going into the year that uncontrollables will impact even the most carefully calibrated targets.