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CEO DES JAHRES

Method

About the Obermatt Rankings

The Obermatt Rankings are an independent performance assessment of the largest companies and segments with publicly available financials. It is based on the Obermatt Index for profit growth and total shareholder return. While indexed profit growth measures operating performance, indexed total shareholder return measures investment performance. (Note: If the results are used for executive remuneration, supervisory boards, remuneration committees and their independent advisors will need to interpret the results in light of special circumstances for the assessed company.) Indexing performance neutralizes external factors such as business cycles, raw material price movements and investor sentiment and uncovers true operating performance. This approach creates performance transparency for boards of directors, shareholders and the public. The CEOs in the rankings also benefit from this transparency, as their performance is confirmed by an independent third party.

Process

The Obermatt Rankings measure executive performance based on indexed operating performance for public companies and their significant divisions (business segments). Results are based on a three stage process:

  1. The Obermatt proprietary correlation algorithm selects highly correlating data points of comparable companies in order to determine the Peer Universe.
  2. Obermatt determines the actual performance of the assessed company stated as Operating Rank, Investment Rank and Combined Rank (the second two are exclusive to the Obermatt Rankings Switzerland Full Report).
  3. Companies and their executives are ranked based on the achieved ranks.

Selection of peers

Selecting the appropriate peers for the peer universe is paramount to the ranking results. The Obermatt proprietary correlation algorithm for Peer Universes selects companies in the same line of business or subject to the same economic cycles. This includes, but is not limited to, direct product competitors. For statistical purposes, Peer Universes ideally comprise between 30 and 70 company data points. However, in some cases, the number of peer data points can divert from this range. (More information at obermatt.com/universe) For its clients, Obermatt selects peers manually, assesses their correlation in additional analysis and, together with the client, agree on the final composition of the Peer Universe and the financial metrics to be used. Obermatt performs additional, manual financial adjustments and provides clients with the financial data used for calculating their ranking. All ranking results are provided according to the Obermatt Declaration of Independence (obermatt.com/bonus-index/independence).

Rank calculation

The Rank shows the performance on a selected financial metric of a company against those metrics of all peer companies in a percentile rank calculation. The percentile value shows how many competitors were outperformed in respect to this metric. If the metric is derived from the balance sheet or profit and loss statement, we speak of Operating Rank. If it is derived from share price performance (in this case Total Shareholder Return (TSR)), we speak of Investment Rank. Operating Rank is calculated using audited historic metrics or deltas of those metrics from one period to the next. For the Obermatt Index, the delta from one year to the next is indexed, because it shows the period performance undiluted by historic events prior to the period.

Operating performance indicator

For the Obermatt rankings, actual operating performance is based on organic EBITDA, or EBIT where EBITDA is not available (e.g. divisions). For financial institutions, EBITDA is replaced by similar profit growth metrics. Organic EBITDA (or other organic profit growth metrics, not separately mentioned thereafter) is adjusted for extraordinary effects, such as mergers and acquisitions activity and restructuring. Obermatt uses organic EBITDA as reported by the Thomson Reuters database. This data provider adjusts for non-operating activities such as sales of divisions, one-off depreciation, restructuring costs and other special items. To further increase the quality and reliability of the Obermatt Index, financial data of ranked companies are manually verified and, if necessary, adjusted. In order to index EBITDA (or other profit growth metrics), Obermatt calculates the Operating Rank of Delta EBITDA. This value is standardized by Sales or Invested Capital to make peers of different sizes comparable (Delta EBITDA scaled by Sales, or Delta EBITDA divided by previous year Sales). For financial institutions, the Sales standardization is replaced by Average Equity or similar standardization. This figure is resistant to influences by accounting practices and not affected by base level effects of EBITDA and, as such, also works for negative EBITDA levels. Increasing EBITDA increases the theoretical enterprise value over the long term, giving management a value to maximize over time. This is not the case for financial ratios such as margins (EBIT Margin = EBIT divided by Sales) or returns (RONOA, ROCE, etc.) which cannot be maximized in the long term. As a matter of fact, they may even provide misleading signals (e.g. provide positive signals in bad years).

For Obermatt clients, other financial metrics such as delta economic profit, sales growth, margins or returns may be used in the Index. In such situations, Obermatt Index peer data may not be derived from the Thomson Reuters database but rather is compiled manually by Obermatt. For Obermatt clients, other financial metrics such as delta economic profit, sales growth, margins or returns may be used in the Index. In such situations, Obermatt Index peer data may not be derived from the Thomson Reuters database but rather is compiled manually by Obermatt.

Investment Performance Indicator

The operating performance indicator Delta EBITDA of the Obermatt Index measures businesses comprehensively and is aligned with valuation theory that measures enterprise value based on operating cash flows only. In the long term, no further performance indicator is required. However, in the short term, executive performance consists of strategic decisions such as investing and acquisition activities, too. Even if those activities are covered by the operating performance indicator in the long term, we see a need for assessing these important strategic decisions in the present performance assessment. Popular methods of accounting for investment and other strategic decisions in financial performance measurement have serious deficiencies. Depreciation periods are driven by tax considerations, impairment tests on intangible assets are based on in transparent valuation models, cost of capital charges are based on immeasurable future return expectations and many strategic decisions remain entirely unidentified in financial reporting. This is why the Obermatt Index refrains from using unreliable data from the balance sheet of financial reports to measure strategic performance but rather uses indexed Total Shareholder Return (TSR) as the short-term performance indicator. TSR is neutralized by inorganic events such as share splits or capital issuance and includes dividend payments. Since shareholder returns are notoriously diluted by investor sentiment, Obermatt indexes the metric. Indexed Total Shareholder Return is free from these dilutions and therefore measures changes in investor expectations about future profits only. In other words, the indexed Total Shareholder Return metric – called Investment Rank in the Obermatt Index– measures current strategic performance of the company. This means that only current strategic decisions are reflected in the metric. Past strategies are measured as multi-year performance by adding the single year ranks of the Investment Rank.

Combined Performance Indicator

The combined performance indicator is the average of the operating (Operating Rank) and the strategic performance indicator (Investment Rank). It provides a more balanced result than each of the single ranks alone. By averaging Operating Rank and Investment Rank, the Combined Rank compensates for arbitrary accounting effects and irrational behavior in the stock market.

CEO-Pay-for-performance ranking

The Obermatt Pay-for-Performance ranking uses CEO remuneration is used as a proxy to assess the company’s remuneration policy. Where available, we use “realised total remuneration” because we compare it to realised total performance. In realised pay, we exclude deferred bonuses awarded in the year and the expected value of share options and other share plan awards in the year, but include the "amounts realised" from LTIPs and deferred share schemes that vest in the year, plus gains on options exercised in the year. These amounts realised are from awards made in earlier years. Realised pay creates the correct incentive for remuneration committees: to design remuneration systems so that they pay for performance in the end.

For CEOs, this method allocates on average the same amount as in the past. As a group, CEOs remain as wealthy as they are today. And for shareholders, pay will be based on independently measured performance with the right incentives to outperform. In countries like Switzerland and Germany, where realised compensation is not disclosed consistently, we use granted pay as proxy for realised pay.

The rule for pay matching performance is simple: the percentile rank for performance should match the percentile rank in pay. We use the Obermatt Combined Rank from profit growth and total shareholder return as the performance percentile rank to calculate deserved pay: the percentile value of CEO pay that matches the Combined Rank. For example, a CEO with a Combined Rank of 67 per cent should have realised total remuneration in the 67th percentile of total remuneration of the same period. Excess pay is the difference between realised pay and deserved pay. The Obermatt "CEO-Pay-for-Performance" metric is the country percentile rank of Excess Pay in percent of Realised pay. Because large companies pay larger compensation, we group CEOs in groups of similar company size for this analysis.

Definitions

  • Company/Segment Name: Name of assessed company or segment
  • Applied Performance Indicator (and value of performance indicator): Financial metric type name and its value used for the Obermatt Index
  • Operating Index: Median performance indicator value of peer data used for the assessed company
  • Operating Alpha Difference between company performance indicator value and Operating Index value
  • Operating Rank: Percentile rank of the operating performance metric value of the assessed company in relation to the performance metric values of peer data used by this company. Ranks can also be cumulated over several years. Typically based on EBITDA or EBIT
  • Investment Rank: Percentile rank of the strategic performance metric value of the assessed company in relation to the performance metric values of peer data used this company. Ranks can also be cumulated over several years. Typically based on Total Shareholder Return (TSR)
  • Combined Rank: Average of Operating Rank and Investment Rank