Page 363 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 7. Short-Term Incentives 349

Job Title. Eligibility could be determined by job title (e.g., vice presidents and above). The
problem with this approach is that the lowest-level vice president may have less responsibility
than the highest-level director. It also raises the issue of organizational comparisons. For
example, are divisional vice presidents as important as corporate vice presidents? Or even, are
vice presidents in one division as important as vice presidents in another? However, for
division-only plans such vertical and horizontal organizational comparisons may not be
important.

Reporting Relationship. Using reporting relationship to determine eligibility (e.g., the
top three organization levels in the company) poses the problem of “executive assistants”
and “assistants to” who meet the definition but are of less importance than many jobs lower
in the organization. For this reason, reporting relationship is rarely the sole criterion for
participating in short-term incentive plans.

Combinations. Because each of the five approaches has one or more disadvantages or
shortcomings, the best approach may be a combination of two or more definitions. For example,
combining organization level and job grade, such as anyone in grade X within the
top three levels of the organization, takes pressure off both job regrading and otherwise
including “assistants” and “assistants to.”
There are no inviolate rules about how far down in the organization short-term incentive
plans should go. Historically, they included only the first several levels of management.
However, over the years, the move has been to include more and more individuals in a
short-term incentive plan wherever possible. In some organizations, this means not only
all individuals exempt from overtime requirements but all individuals in the company!
While some of the material in this chapter could be considered for broad-based, short-term
incentive plans, the emphasis is on plans for those in the upper levels of the organization—the
executives! When executives are involved in short-term incentive plans (and it is logical to
reward them for short-term success), target amounts must be carefully examined in relation to
potential payouts under long-term incentives. If short-term incentives are financially more
attractive, executives might not adequately focus on long-term issues.
The percentage of employees included in the short-term incentive plan depends on
the specific characteristics of the company, but it usually ranges from around 1 percent to
5 percent. On one end of the scale is the highly profitable, heavily capitalized, high-tech, decen-
tralized company in the maturity phase. In such a company, 5 percent or more of the total
employee population may be affected. On the other end of the scale is the labor-intensive,
low-tech, strongly centralized company in the threshold stage. In such a company, less than
1 percent may be affected. The specific combination of these factors, as shown in Table 7-2, has
a strong impact on the percentage of eligible employees in a specific company.

Low Percentage High Percentage
Labor intensive Capital intensive
Low technology High technology
Centralized management Decentralized management
Threshold stage Maturity stage

Table 7-2. Percentage of employee population eligible for short-term incentives