Understanding Nonfinancial Metrics

Financial metrics are associated with financial statements prepared under generally accepted accounting principles (GAAP). These metrics are important, because many performance drivers are best measured through a financial metric visible in a company’s balance sheet, income statement, and cash flow statement—all prepared under GAAP.

Understanding these financial statements is a hallmark of financial literacy, which is strongly recommended for all directors and strictly required for public company audit committee members. Financial literacy is generally defined as the ability to “read and understand fundamental financial statements.”

The focus on the board’s compensation committee has never been sharper. The components of compensation plans and the link between compensation and company performance are under intense scrutiny from shareholders, employees, policymakers, the media, and other stakeholders. The Report of the NACD Blue Ribbon Commission on the Compensation Committee revisits NACD’s 2003 Report of the NACD Blue Ribbon Commission on Executive Compensation to highlight the new environment in which compensation committees—and, more broadly, boards—are now operating. It recommends that the compensation committee and board work together to establish an executive compensation philosophy that supports the company in creating long-term, sustainable value.

The report includes ten specific recommendations for compensation committees to consider when evaluating their compensation philosophies. It also provides practical tools, such as sample compensation committee charters, a compensation committee assessment, and guidance on executive employment contracts.