How Does Performance-based Compensation Work?

By Robert J. Grossman

April 2009 CoverIf the stock price increases a dollar, the executive reaches the threshold and is eligible for compensation; for every additional dollar the stock goes up, the executive rakes in the money. He or she gets a prorated amount, determined by a formula set in advance, until reaching the target. Achieving the target entitles him or her to 100 percent of pay for performance. If the executive achieves somewhere between threshold and target, he or she receives proportional compensation. Exceeding target and reaching a pre-set maximum entitles the executive to an amount that exceeds 100 percent of target. Some proxy statements provide for 120 percent of the target.​


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