Page 364 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

350 The Complete Guide to Executive Compensation

Once an incentive plan is established, requests to expand eligibility will begin within a
very short time. Therefore, plan designers need not only a strong rationale for eligibility
when the plan is introduced but also must consider how eligibility will be expanded and
over what period of time. Alternatively, planners can develop a firm basis for the demarca-
tion. Unfortunately, a clear line between eligibility and ineligibility is rare. There is almost
invariably a gray area. Yet, for the employees, the situation is simple—they are either bonus
eligible or not.
The status associated with being in the bonus plan is sufficient reason for employees
to lobby for expansion. A significant compensation difference between the lowest-paid and
the highest-paid bonus candidates compounds the problem.

AWARD SIZE

Award size can be expressed in relation to the amount of incentive needed to be competitive
on total annual pay in the marketplace. This is illustrated in Figure 7-2. The examples range
from no risk (all salary) to high risk (low salary). The amount of incentive (shaded area,
Figure 7-2) needed to bring the individual’s pay to the competitive level is called the target
award. The difference between the competitive pay level and the person’s salary is the risk
level, often called the downside risk. The amount of incentive available above the target
amount is called the upside opportunity. Typically, this increases at least proportionately with
the amount of the risk.

Competitive Target
Pay Level Award

No Low Moderate High
Risk Risk Risk Risk
Figure 7-2. Risk/reward relationship to market data

Salary-only plans are no-risk plans, as are those with some incentive opportunity above
salary but only for superior performance. Some describe bonus as a payment for performance
above expectations. This would be consistent with the “no-risk” profiled in Figure 7-2.
However, in this section “bonus” and “annual incentive” will be used interchangeably.
One would expect to find no-risk plans in government agencies, while low-risk plans
might be logical in heavily regulated industries and high-risk plans would be found in a very
competitive industry. One might also expect risk to increase as individual performance
becomes dominant and decrease as group performance becomes a factor. In other words, risk
varies directly with importance of individual performance.