Dear Workforce What Percentage Of Total Compensation Should Add-On Bonus Programs Represent

By Staff Report

Sep. 7, 2011

A Dear Compensation Manager:

Your question actually hits upon several different aspects of incentive payplanning and structure. Let’s take each in turn:

First, the underlying purpose or focus of any incentive program is to supportthe achievement of certain organizational objectives, whether performance ismeasured at an individual, team or business unit level.

In this regard, a critical design focus is ensuring that performance measuresare integrated, particularly across multiple plans. Variable pay programs andperformance measures must complement and support each other, as well as businessstrategy. Employees are typically rewarded by measuring performance in terms ofthe primary role that they play in the organization. For example, if asalesperson has a total of 50 percent of pay at risk, that incentive should beearned through some sort of sales performance measure — measurements that aredefined through the business-planning process.

Participants that do not achieve at least minimal performance standards vs.these primary measures would receive little or none of their variable pay. Ifgenerating revenue (hopefully, profitable revenue) is their role, then thegreatest part of their variable should be geared towards that. I would not wantparticipants to be able to “make up” their lost incentive by allowing themto earn dollars for doing things not considered a critical part of their role,except in very rare cases.

Second, the level of pay at risk will vary based on a number of factors. Whatdoes the market indicate for pay at risk for similar positions in similarcompanies? How much pay is the individual willing to put at risk, and what isthe reward for success, particularly on the upside? What level of incentive isappropriate given the person’s impact on the performance measures, and theirability to achieve set objectives within a given time frame? Should theindividual be participating in multiple incentive plans?

Companies need to systematically examine and adopt the type of compensationstructure that is most appropriate for their current and anticipated businessenvironments. The structure, as well as the focus of the plan, must reinforcethe strategic direction of the business.

Finally, most plans establish various types of complimentary measures aroundachievement and payouts. Plans can allow for establishing threshold (minimum)levels of performance for particular measures, below which no payout is made.Some plans predicate any payout based on a threshold level of performance arounda key objective, such as overall territory gross margin, net profit, or repeatcustomer sales volume.

If threshold performance is not achieved, there is no payout at all under theplan, no matter how well the participants did on other performance measures.Alternatively, companies can deal with integration through a matrix that relatestwo performance measures to a single payout formula, again, establishingthreshold performance standards for each measure below which no payout of anykind is made. Going back to a point that I made earlier, this type of system canbe successful in achieving the type of program integration that is crucial withvariable pay plans.

Bottom line: pay fairly, equitably and competitively. You will get thebehaviors you pay for. Make sure they are the ones critical to company success.

SOURCE: BobFulton, Project Consultant, The Pathfinder’sGroup, Chicago,Illinois, Feb. 19, 2002.

LEARN MORE: Is Your Company’s Rewards Package Out of Sync?

The information contained in this article is intended to provide usefulinformation on the topic covered, but should not be construed as legal advice ora legal opinion. Also remember that state laws may differ from the federal law.

Aska Question

DearWorkforce Newsletter

What’s New at

blog workforce

Come see what we’re building in the world of predictive employee scheduling, superior labor insights and next-gen employee apps. We’re on a mission to automate workforce management for hourly employees and bring productivity, optimization and engagement to the frontline.

Book a call
See the software

Related Articles

workforce blog


Minimum Wage by State in 2023 – All You Need to Know

Summary Twenty-three states and D.C. raised their minimum wage rates in 2023, effective January 1.  Thr...

federal law, minimum wage, pay rates, state law, wage law compliance

workforce blog


Exempt vs. non-exempt employees: knowing the difference

Summary Employees are exempt from FLSA requirements when they meet specific exemption criteria based on...

Department of Labor, exempt employees, Misclassification, non-exempt employees

workforce blog


California fast food workers bill: why it’s more than meets the eye and how to prepare

Summary: California signs bill establishing a “fast food council” that has the power to raise the indus...