Page 407 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 7. Short-Term Incentives 393

Salary Variance
After
Performance Increase Bonus Total Amount Percent
Increase
6 $50,505 $439,005 $132,090 $571,180 $86,473 17.8%

5 42,735 431,235 109,942 541,181 56,474 11.7
4 34,965 423,465 88,190 511,655 26,948 5.6

3 27,195 415,695 66,045 481,740 2,967 0.6
2 19,425 407,925 43,900 451,825 32,882 6.8

1 11,655 400,155 22,145 422,300 62,409 12.9
0 0 388,500 0 388,500 96.207 19.8

Current $388,500 $96,207 $484,707 — —
Table 7-46. Individual bonus examples based on different performance ratings

Note that because the individual had such a high rating (and resulting high bonus) last
year, anything less than a 4 will result in a decrease in total compensation (even though there
will be a salary increase). Conversely, if last year’s performance rating (and bonus) had been
lower, there would still have been a possibility for less compensation (for a significantly lower
performance rating) but the upside potential would have been proportionately greater. This
specific example can be broadened to a full test of the “stretch” by examining all performance
possibilities (current versus previous year) for the highest grade (e.g., 35) and the lowest
(e.g., 20). Shown in Table 7-47 are the results of such a test. Note that there are 49 (last-year
versus current-year performance) combinations, although pragmatists would challenge the
likelihood of dramatic changes (e.g., 6 last year and 0 this year). However, even an examina-
tion limited to plus or minus one level of performance (e.g., 4 last year could be 3, 4, or 5 this
year), shown in the banded area, results in appreciable change in rate of movement. For
example, in grade 20 a person with a 3 rating last year would receive 2.2, 7.0, or 11.8 percent,
depending on whether this year’s rating was 2, 3, or 4.
In comparing the results from the two grids, it is also apparent that there is considerably
more upside and downside risk in compensation at grade 35 than at grade 20, although repeat-
ing the same performance would generate about the same increase. For example, while a 3 last
year would receive 7 percent if a 3 again this year in both schedules, the impact of being a 6 this
year would be a 21.6 percent increase in grade 20 versus a 35.1 percent adjustment in grade 35.
Stated another way, there is a greater proportional reward for improving performance in the
upper grades as well as a more dramatic drop in pay for not maintaining performance levels.
The amount of impact a lower performance rating has on total compensation is a func-
tion of salary and bonus guidelines. The more spread in both for differences in performance,
the greater the downside risk for reduced compensation if performance drops off.
The Balanced Scorecard. Typically, plans will use only financial measurements. As
described in Chapter 2, while financial measurements dominate the landscape, there are other