Page 375 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 7. Short-Term Incentives 361

Individual Award Determination
Funding Discretionary Formula Combination

None A B C
Discretionary D E F
Formula G H I
Combination J K L

Table 7-13. Funding and individual formula awards
Nonfunded Plans

Discretionary Individual Awards (A). This combination works best with small organiza-
tions. The CEO looks at the performance of each individual and determines what is believed
to be an appropriate bonus.
Formula Individual Awards (B). This is a very common approach. It is plan “A” advanced
to the stage where size necessitates a more formal approach to determining the size of the
individual awards. Table 7-14 shows an example of such an individual formula-determined
approach.

Percentage of Salary
Operating Income CEO COO EVP

$75 mil and up 200% 160% 120% Maximum

75 180 144 108
70 160 128 96
60 140 112 84

50 120 96 72

45 100 80 60 Target
40 70 56 42
35 40 32 24 Threshold

30 and below 0 0 0
Table 7-14. Individual formula award based on operating income

Here target payouts (identified as the normal award) are tied to the business-plan objec-
tive and are structured to vary with degree of target attained. Note that the drop-off in salary
percentage below target is greater than the increase above target. Payout is a percentage of
salary, with both a minimum and maximum established and incremental in distribution. In
this case, the business plan calls for an operating income of $45 million.