Page 401 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 7. Short-Term Incentives 387

Corporate earnings increase 11.5%
Group A income increase 12.0%
Division A
Increase in income before allocation 17.5%
Increase in net sales 16.3%
Return on capital 17.0%
Percentage point increase in parity goal 8.8%

The next step is to identify the performance for each goal. Notice that most require
interpolation between values. Thus, an 11.5 percent increase in corporate earnings is a
4.5 rating. In a similar manner the performance ratings for each of the other objectives may
be calculated, resulting in the following:

Performance Rating
Corporate earnings increase 4.50
Group A income increase 3.00
Division A
Increase in income before allocation 4.25
Increase in net sales 3.65
Return on capital 4.00
Percentage point increase in parity goal 5.80

Determining the overall divisional performance is a matter of adjusting these scores by
their respective weights and dividing by 100.
4.25(40) 3.65(30) 4.0(10) 5.8(20)
—————————————————— 4.4
100
Calculate the combined rating by weighting the corporate, group, and division per-
formance ratings in a similar manner.
4.5(25) 3.0(25) 4.4(50)
———————————— 4.1
100

To use this rating to determine the bonus fund, a bonus table similar to the one in
Table 7-31 (shown earlier) must be established. As can be seen, bonus percentages are
established by grade for each level of performance. The amount of reward should be
proportionate to the degree of risk; therefore, bonus percentages increase as one moves
upward through the salary structure. By many standards, this would be considered a
relatively modest level of payout at the upper end of the structure. Certainly, this would be
true in the absence of long-term incentives. In this particular example, bonus eligibility
begins with grade 20.
Since the combined weighted performance rating in our example is 4.1, it is necessary
to interpolate 10 percent of the difference between columns 4 and 5. To generate a guide-
line bonus total, multiply the appropriate percentage for each grade by the average salary
and the number of employees, as shown in Table 7-40. This is called a performance-adjusted,
sum-of-the-targets approach.