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.

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