Page 414 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

400 The Complete Guide to Executive Compensation

expenses that have little to do with pay for performance. The hypothesis that companies
with incentives outperform those without has been challenged by many. It is possible to
construct a study to prove that nonbonus companies outperform bonus companies.
Nonetheless, others will argue that companies should not abandon pay for performance
because of problems in performance measurement, but rather should work to improve the
performance criteria.
One should be careful to avoid making the plan overly complex. A simple plan is prob-
ably easier to communicate and understand. An example of a simple but effective incentive
plan was implemented hundreds of years ago. Typically, workers would add sand to the
floor of a room when they were decorating the walls, gradually almost filling the room so
they could work on the ceiling. To motivate a speedy removal of the sand, the owner
announced at the end of the job that he had planted a number of pieces of gold at the
bottom, near the floor, which were rewards for those who found them. Such a plan,
however, will only work once. Next time the workers will begin searching the sand the
morning after the job has begun, thinking the owner planted the gold overnight.
Fortunately, well-thought-out incentive plans are likely to last much longer. However, they
too must be updated.
Table 7-49 summarizes the major considerations when designing the short-term incen-
tive plan. Within the framework of the design considerations listed in Table 7-49, Table 7-50
lists the action steps.

1. What performance?
2. Whose performance (company, unit, and/or individual)?
3. Who is eligible?
4. How much will be paid?
5. Will the plan be funded or discretionary?
6. When and in what form will payment be made?

Table 7-49. Short-term incentive plan design considerations

1. Determine who will be eligible.
2. Determine at what level in the organization performance is to be measured.
3. Establish the threshold, target, and maximum payments by performance level.
4. Adjust the salary structure to incorporate the annual incentive structure.
5. Identify and quantify the measurables.
6. Develop an incentive plan formula to provide an appropriate pool at various performance levels
(if a fund is desired).
7. Determne impact of plan on financial statement.
8. Communicate and implement the plan.
9. Measure business performance and allocate to units.
10. Units allocate to individuals based on their performance.
11. Analyze the results and make appropriate changes in plan.

Table 7-50. Short-term incentive plan action steps