The individual components in an incentive compensation plan need to have specific goals and objectives

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

Individual performance in an incentive compensation plan.

An incentive compensation plan needs to have goals that we can specify and objectives that we can specify both for the company and for the individual employee. They need to be able to have some way of measuring those. For those of you who work with balance scorecards, that’s often a mechanism that’s in place. And it’s administered in a way that people have confidence in, is a very effective way of accomplishing that.

An annual incentive compensation plan can sometimes include claw back provisions based on future financial performance. Often what we are seeing now at the very top of the house or companies – especially public companies – is we’re including (claw back provisions) for senior management in the event of a financial restatement. If you told us today that your company earned $1,000 and therefore we paid you a bonus, and then two years, the accountants come back and we find that there was a problem in the books. And we restate those numbers down – we’re actually building in procedures within the program in order to recoup some of that money.

Design concerns in an annual incentive compensation plan
When you design your annual incentive compensation plan, some of the things you want to be concerned about is how you balance salary versus bonus? What are the targets you’re going to set for bonus? And therefore, how does that balance out with the total compensation – total cash compensation – in terms of looking via – another item is how much upside opportunity do I want to have? One of the big debates taking place today is, should there be a cap on annual incentives? Or should we just be able to max pay outs in some way? Should there be limit put?

What we found last year was that 1/3 of the Fortune of – excuse me – the S&P 500 for CEOs had no caps on their bonuses. And in fact, amongst that group, the average pay out was four times salary. A normal structure would be a CEO having – CEO or senior executive – having the ability to earn a 150% to 200% of their bonus target. So obviously, those are cases where people were able to exceed it because there was no cap in terms of what was going out.

And the other issues that I’ve mentioned before is how do you want to pay it out? Do you want to pay it out in cash? Or do you need some other forms in order to provide that kind of benefit.

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

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