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Obermatt Bonus Index Method
1 Purpose
The purpose of the Obermatt Bonus Index is to calculate deserved bonuses based on indexed operating performance for public companies and their significant divisions (business segments). Indexed bonuses have the advantage that they pay appropriate bonuses that are neither too high nor too low. Traditional non-indexed bonus plans typically pay excessively high bonuses in up-cycles and bonuses that are too low in downturns. Indexed bonuses avoid this by assessing performance relative to peers, thereby measuring true operating performance only, not the economy’s performance (external factors such as business cycles, resource price changes, customer demand or market sentiment at the stock exchanges etc.).
This is why indexed bonuses stay fairer even in strong up or down-cycles. Indexed bonuses do not need pre-negotiated financial targets. Therefore, they can be assessed outside-in by the objectively derived Obermatt Bonus Index. Indexed bonuses for assessed companies or divisions are determined in a three stage process:
| 1. | Obermatt creates a peer universe of comparable companies which defines the relevant market of the assessed company. |
| 2. | Obermatt determines the actual performance of the assessed company as Operating Rank. |
| 3. | Based on the achieved Operating Rank |
2 Definition of the Peer Universe
Defining the industry sector and selecting an appropriate peer universe is paramount to the Bonus Index results. Peer selection involves selecting companies which are in the same line of business as the company or division being ranked. For this purpose, Obermatt uses the Standard Industrial Classification (SIC) and the Global Industry Classification Standard (GICS) to categorize the selected companies to their particular industry sector. Additionally, Obermatt performs a keyword and a manual search to narrow the peer universe to represent the company to be ranked as accurately as possible. Each peer universe ideally comprises around 30-200 companies. However, in some cases the peer universe can be smaller than 30 or even larger than 200 companies.
More information on www.obermatt.com/peer-universe.
3 Operating Rank
The Operating Rank converts the absolute values of performance measures to percentile rank values. Operating Rank shows the operating performance on any value driver of a company against the performance of all peer companies for that same metric. The market performance is provided by showing the percentile ranks on a percentile rank chart called Operating Rank. Operating Rank is calculated using actual historic data or deltas of that data from one period to the next. Operating Rank is part of Obermatt's indexed operating performance approach to indexed performance management and investing.
More at www.obermatt.com/operating-rank.
4 Performance Metric
For the Bonus Index, actual performance is based on organic EBITDA or EBIT where EBITDA is not available. For financial institutions, EBITDA is replaced by Net Income. Organic EBITDA (resp. Net Income, not separately mentioned thereafter) is free from extraordinary effects, such as effects from mergers and acquisitions activity and restructuring. Obermatt uses organic EBITDA as reported by the Thomson Reuters Worldscope database. This database adjusts for non operational activities such as sales of divisions, one-off depreciation, restructuring costs and other special items. To further increase the quality and reliability of the Bonus Index, financial data of the 10% best performers were manually verified and, if necessary, adjusted (see notes in this report).
Obermatt indexes EBITDA by calculating the Operating Rank of Delta EBITDA in percent of sales (DEBITDA%sales). This figure is robust against influences by accounting decisions and not affected by base level effects of EBITDA and thus works for negative EBITDA levels as well. For financial institutions, Sales is replaced by Average Equity.
5 Bonus Calculations
Since Operating Ranks are independent of external factors (including investor sentiment) and a standardized performance measure, deserved bonus levels are directly derived from the Operating Rank. The Bonus Index uses the following formula for calculating the Bonus Multiple.
Bonus Multiple = 2 * Operating Rank on DEBITDA in % of sales
The Bonus Multiple is the factor by which individually agreed target bonuses (e.g. typically expected or average historic bonus levels) are multiplied to obtain the actually deserved indexed bonus. For instance, if the agreed target bonus is €10’000 and the Bonus Multiple is 1.2, the deserved actual bonus is €12’000 (1.2 times €10’000).
The following graph illustrates how Operating Rank is converted into Bonus Multiples: