Annual Incentive Plan Design
The goal of an effective annual compensation program is to align pay with concrete measures of company performance. To achieve this goal, any well-designed incentive plan must be designed using a rigorous process which includes the selection and weighting of performance metrics.
Annual Incentive Plan Design Consulting Services
At NFP Compensation Consulting , our annual incentive plan design services include:
- Design or recommend the restructuring of annual incentive programs to maximize employee motivation and promote achievement of company goals and objectives.
- Plan features and recommendations with formula vs. discretionary targets, thresholds, maximums, payout timing, vehicles, plan metrics, etc.
- Drafting of communication documents.
The Annual Incentive Plan Process
When your company implements an incentive plan design, best practices often include four categories of involved parties:
- Senior Management (often includes several different people on the design team)
- The Compensation Committee
- Audit Committee representative (the “Audit Committee”)
- Compensation Consultant (the “Consultant”)
As a result, the question which arises most often during the design process is, “Who creates and who critiques?” The following provides a roadmap for navigating the assignment of responsibilities.
Item 1: Incentive Payout Targets, Threshold and Maximum
Create: Consultant – Critique: Management & Compensation Committee
Item 2: Metric Selection
Create: Management – Critique: Compensation Committee, Audit Committee, and Consultant
Item 3: Measuring Performance
Create: Management – Critique: Compensation Committee, Audit Committee, and Consultant
Item 4: Senior Management Payouts
Create: CEO – Critique: Compensation Committee, Audit Committee, and Consultant
Item 5: Chief Executive Officer Payouts
Create: Compensation Committee & Consultant – Critique: Audit Committee & Full Board of Directors
For a more detailed look at our annual incentive plan process, please contact us today.
Leaders in Annual Incentive & Compensation Plan Design
At NFP Compensation Consulting, we believe that ROI should be the driving factor in annual incentive plan design. The design of any incentive plan should first be based on the level of ROI that the company determines the plan should generate and on how much the company is willing to invest in order to achieve that return on investment.
The plan’s funding should be based on the achievement of quantitative objectives that change as the business grows. It should also be noted that financial ROI is not the only way to measure the value generated by an incentive plan. Tools like employee attitude and customer satisfaction surveys can provide valuable insights into a plan’s return on investment while not clearly translating into direct financial measures of an incentive plan’s success.
