Page 399 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 7. Short-Term Incentives 385

A variation on this method of determining divisional awards is to express the performance
evaluation in terms of an interim score and later convert this score to a bonus percentage. This
can be illustrated with a multigoal requirement.

Goals by Organizational Level Example. Assume that the corporate goal is to increase
net earnings by 10 percent, the group goal is to improve net income before allocation by
12 percent, and the divisional goal is to increase income before corporate allocation by
15 percent. Rating scales such as the ones in Table 7-37 might be developed.

Corporation Group A Increase Division A Increase
Evaluation Increase in in Income Before in Income Before
Net Earnings Allocation Allocation

6 13.0% and up 16.5% and up 21.0% and up

5 12.0 15.0 19.0
4 11.0 13.5 17.0

3 10.0 12.0 15.0

2 9.0 10.5 13.0
1 8.0 9.0 11.0

0 Below Below Below
Table 7-37. Evaluation schedule for corporation, group, and division

Note that in these evaluation grids there is equal reward or penalty for a percentage
point; the earlier grid penalized below-goal achievement more severely than it rewarded
overachievement. The former is more consistent with a company that has discounted its
salary line by some portion of bonus and therefore has to be more tolerant of below-
expected performance in allowing some bonus; the latter approach is appropriate for
a company that has a competitive salary (without discount) and is therefore prepared to
cut back sharply on below-target performance. Note also that the progression on the
division performance table is more dramatic than the corporate (even though both are
arithmetic constants).
Given the high percentage income expectations, it appears that division A is in an
earlier stage of development than the corporation, although new products and/or significant
price increases might be accounting for the difference.
A totally different situation is shown in Table 7-38. Here’s a division that is obviously
in trouble since its objective is to just break even. Note that the objective is expressed
in absolute rather than relative terms (i.e., dollar amount of profit or loss rather than
percent change).
In addition to Table 7-37, let’s assume that division A has several other objectives: sales,
return on capital, and affirmative action achievement. The first two are financial; the last is a
nonfinancial EEO goal. Shown in Table 7-39 are possibilities for each.