The alchemy of executive compensation can be as risky as mixing combustible chemicals in the science lab. If there's no clear link between pay and performance, it can explode into a public relations nightmare.

Here's the rub, though: How do you define performance? And how do you set long-term performance goals in the ever-shifting tech industry, where product cycles are sometimes measured in months?

"Honestly, when we tried to pick actual performance numbers, it's feast or famine," said Reid Linney, a longtime human relations executive with Advanced Micro Devices in Sunnyvale. "You either blow it out of the water or you aren't even on the map."

Traditionally, valley companies have tied stock-based compensation to two criteria: time on the job and stock price appreciation. In short, executives qualified if they stayed with the company until their awards vested, typically one to four years, and if the stock price rose.

But critics complain that options can pay off hugely even for laggard companies if a bull market boosts their stocks.

Valley companies use varied yardsticks. Some use measures of corporate finance such as revenue growth, cash flow and operating income. AMD's approach is to peg rewards to beating its peers, an idea that theoretically works well whether the cyclical semiconductor industry is in a boom or bust phase. Other companies are looking to mileposts such as rolling out a new product, winning government approval of a drug, or posting successive quarters of revenue growth.

Whichever way companies lean, Tim Sparks, who heads the compensation consulting firm Compensia, advises them to keep shareholders' interest in mind.

"My own bias," he said, "is to keep it simple and look for a performance metric everybody understands."

Contact Mark Schwanhausser at mschwanhausser or (408) 920-5543.