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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 for executives and fairer for shareholders 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, Obermatt calculates the deserved bonus as a Bonus Multiplier compared to individually agreed, expected or average bonus levels.
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 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 financial metric of a company against the performance of all peer companies for that same metric. The indexed performance is provided by showing the percentile ranks on a 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 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 Operating Income. Organic EBITDA (or organic Operating Income, not separately mentioned thereafter) is free from extraordinary effects, such as 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 all ranked companies were manually verified and, if necessary, adjusted. For Obermatt Bonus Index Inside customers, other financial metrics such as Delta Economic Profit or Sales Growth may be used in the Bonus Index. In such situations, peer data may not be derived from the Thomson Reuters Worldscope database but is compiled manually by Obermatt instead.
Obermatt indexes EBITDA (or EBIT or Operating Income) by calculating the Operating Rank of Delta EBITDA. This value is standardized by Sales or Invested Capital to make peers of different size comparable (DEBITDA ./. Sales or DEBITDA ./. Invested Capital). 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. Increasing this metric always increases the theoretical enterprise value. Therefore, management can maximize this value in the long term because more EBITDA in the long term is always more valuable than less. This is not necessarily the case for other financial ratios such as margins (EBIT Margin) or returns (RONOA, ROCE, etc.). For financial institutions, the Sales standardization is replaced by an Average Equity standardization.
5 Bonus Rating
The Operating Rank for a rated company is converted into a Bonus Rating using the following table:
| Rank | Rating | Description | Rank | Rating | Description |
| 90-100% | H+ | High Bonus | 40-60% | M- | Median Bonus |
| 80-90% | H | High Bonus | 30-40% | B | Below Average Bonus |
| 70-80% | A+ | Above Average Bonus | 20-30% | B- | Below Average Bonus |
| 60-70% | A | Above Average Bonus | 10-20% | L | Low Bonus |
| 50-60% | M | Median Bonus | 0-10% | L- | Low Bonus |
6 Bonus Multiplier
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 Multiplier.
Bonus Multiplier = 2 * Operating Rank
The Bonus Multiplier 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 Multiplier is 1.2, the deserved actual bonus is €12,000 (1.2 times €10,000).
This bonus formula pays no bonus for the worst performance, average or expected (1.0 x bonus) bonuses when the Operating Rank is 50%, and 2.0 times bonus when the Operating Rank is 100%.
Bonus Index customers may replace this formula with another previously agreed formula depending on their strategic goals and their compensation philosophy. For instance, a growth focused company may pay 100% bonus at an Operating Rank of 75%. Another company that pays bonuses only for outperformance might decide not to allocate a bonus below an Operating Rank of 50%. The bonus formula is typically determined by the board of directors at the beginning of the performance measurement period. If desired by the company, this company specific indexing formula can be used for calculating the bonus multiplier in the Obermatt Bonus Index.