Tag Archives: Discretionary

How Do You Create an Incentive-based Compensation Plan? Seven Ideas

Situation: A CEO wants to build additional incentives into the company’s compensation plan. The objective is to add group incentives to the pay mix – to focus more attention on group performance rather than just company goals. How do you create an incentive-based compensation plan?

Advice from the CEOs:

  • The best policy is to be upfront, open, and transparent as the plan is presented.
  • Communication is the key to success, including the following bullet points:
    • Pay starts at a base which is 75th percentile – a generous base in our industry.
    • Group bonuses, which reflect the results of the group’s efforts, allow you allow to reach the 90th percentile or higher.
    • On top of this, profit sharing enables the addition of 10-20% of your base.
    • Altogether, management thinks that this is a generous package. The difference from the old system is that employees will be rewarded for making decisions which will benefit the group as well as the company – and you will be generously rewarded for this.
  • Once plans are communicated to employees 1-on-1, reinforce the message with a group presentation and open discussion at monthly company meetings.
  • Consider: significant changes in compensation may be best taken in small rather than large increments. Start with small incremental adjustments. If these are effective proceed to larger increments on a planned and open schedule. This is particularly true if the historic culture has been that we all win or lose together.
  • A downside of rewarding by team is that some will get rewarded for producing minimal results. Consider some percentage of discretionary payments to recognize and reward effort instead of pure parity within the team.
  • Consider longer-term results within the payment scheme – not just quarterly results.
  • People need to know that they are accountable. Let them know that a 75% base is reasonable but that the significant rewards will be for producing results above this level.

What is an Effective Sales Compensation Plan? Seven Thoughts

Situation: The CEO of a software company pays a high base and incentives for their key sales person. While this is in line with the company’s industry, the CEO wants the opinions of others as to the comp packages they offer and any controls that they put in place. What is an effective sales compensation plan?

Advice from the CEOs:

  • While the paid seems high, your industry may be different from other industries. Most see a 50/50 split between base and incentive as the norm.
  • Consider a draw system so that if the individual falls behind you have the option to reduce future draws.
  • Look at both the compensation formulas, and at the individuals’ predilections and the behaviors that you want to generate. Compensation should align with desired behavior and results.
  • Do you have bonus incentive plans in place for your sales support people? Consider these, and check whether the goals and objectives for your sales and support people complement each other. They should.
  • Consider a discretionary bonus pot that you can use to reward specific achievements at your discretion.
  • What will you do if your sales person performs significantly below target – for example, this person is only hitting 40% of the objective after 2-3 quarters?
    • Consequences for non-performance should be clearly understood by both you and the employee before you launch any new plan with the individual.
  • Whatever you decide for this person, you may well be setting a standard that you will have to live with as you hire additional sales personnel.

What’s the Best Way to Allocate a Bonus Pool? Three Points

Situation: A company allocates 10% of pre-tax profit to a Bonus Pool. Employees qualify for quarterly bonuses based on company and group performance, and for semiannual bonuses based on individual performance. Last year not all funds were paid out of the pool because some employees failed to hit performance targets. What’s the best and fairest way to allocate the excess funds in the pool?

Advice from the CEOs:

  • Why not let the pool be the pool? Employees will or will not qualify for bonus participation based on individual and group performance. The company determines who qualifies at each level and these individuals become the pool participants, splitting the full pool in proportion to their level of qualification and their salary.
  • Not all companies will do this based on pay and bonus level policies. For these companies there are options on what to do with unpaid bonus funds in the pool:
    • Leave the funds in the pool for future distribution;
    • Shift unpaid bonus to Retained Earnings; or
    • Retain a percent of the funds in the pool and shift the rest Retained Earnings.
  • Another consideration is whether to use discretionary or metric criteria to determine bonuses. Some companies use only or primarily metric criteria, others use discretionary criteria, and some use a blend of metrics for one portion of the bonus with the remaining portion discretionary. The rationale behind discretionary criteria is to give managers the opportunity to recognize extraordinary contributions that fall outside the normal metrics.

What are Your Plans for 2011 Bonuses? Seven Thoughts

Situation: A company has historically given Christmas bonuses at the rate of 10-20% of salary in a good year. The CEO is concerned that employees may stay until their bonus is received, and then leave for another job. What are your plans for 2011 bonuses?

Advice from the CEOs:

  • First, what is your objective in granting bonuses? Which among the following are you trying to achieve?
    • Showing appreciation.
    • Acknowledgement of effort.
    • Effort above and beyond the norm.
    • Once you determine your goal, design a structure that will effect this goal.
  • What practices are typical for your industry – your competitors, vendors and clients?
    • Background research on industry practices provides a basis for your own practice. You can then evaluate whether varying from industry practice can give you an advantage.
  • Company performance should be a factor in determining bonus payment. So should performance against individual employee goals and objectives.
  • How much discretion should be given to managers for setting bonuses for their direct reports?
    • Talk to your managers and get their input on how they would handle bonus evaluation.
    • A number of companies give managers a pool guideline, and have them produce a spreadsheet of recommended bonus distribution for executive review and approval.
    • Individuals should not decide their own bonuses. Bonuses for all employees/managers should be decided by their direct supervisors.
  • Should the CEO be concerned if an employee takes their bonus and then leaves?
    • If an employee has earned their bonus, then you are granting them an earned reward. Their departure likely has much less to do with whether or not they receive a bonus than other factors.
    • Human resource research consistently demonstrates that compensation is at the bottom of the ladder of reasons that workers remain or leave – particularly workers who exercise critical thinking and judgment in their jobs.

Key Words: Strategy, Team, Bonus, Annual, Christmas, Incentive, Objective, Industry, Reward, Performance, Measurement, Discretionary