Discretionary assessments in an incentive compensation plan.

by on June 30, 2009 · 0 Comment POSTED IN: HR Info Center

Compensation flexibility allows for managers to use incentive compensation plan effectively

Generally, that means we’re using non-formulaic assessments to come up with an incentive compensation plan reward – where some someone is making a determination that you did a job at about the level that we expected of you. And therefore, we will pay you a target bonus. Did you exceeded expectations, or fell short of expectations, and we need to pay you more or less.

The challenge with an incentive compensation plan like this is – unless there’s a lot of good communication going on during the year, it may be difficult for the executives to predict exactly where they’re going to come out or what their reward will end up being. That said, that there are many senior managers that I deal with, that really enjoy this kind of incentive compensation plan. They’re most comfortable with these kinds of plans because it gives them the greatest flexibility to provide compensation at the levels they want for people in a way that they deem appropriate. The key in all that is to make sure that when that executive is making a incentive compensation determination that it’s a kind of a mutually understood and explained item as to how we got to that number.

A budgeted incentive compensation plan metrics
That’s where we set out goals and at the beginning of the year and we measure performance during – at the year. And this can be different types of performance assessments. It could be based on corporate, very common ones – things like earnings or financial returns, revenues. Some industries may even use market share.

Business then from having everybody in the same boat of corporate earnings, it’s also possible that we would be using business unit or the functional arm, the area of the company. And generally, those are based on financial metrics based on a plan of some sort – it could be the same ones we mentioned just before.

Edited remarks from the Rapid Learning Institute webinar-Executive Compensation: What Worked and What’s Fair by Steve Hall

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