descriptionIssue Brief Posted on: 6/21/2016

Compensation Moneyball, Part II: The Simulation of Performance Targets

David Outlaw

Today’s compensation committees have a greater expectation of rigor and analytics in goal-setting for performance awards. In the first edition of Compensation Moneyball, we introduced distribution fitting as one technique that companies can add to their goal setting process.

Now we introduce another data-driven approach to goal setting. This one uses Monte Carlo simulation and can provide additional support for the goals you set.

In this Issue Brief, we discuss the basic mechanics of a Monte Carlo simulation plus ways it can help set operational metric goals and test the validity of the results. We then look at case studies of companies that currently grant performance awards with operational metrics to show simulation in action.

 

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