Page 549 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 9. Design and Communication Considerations 535

was done. Performance goals set at the beginning of the year need to be updated during the
year and factored into the incentive plan. Goal setting will be more difficult as individuals
learn to lowball their targets, making it easier to receive incentive pay. The importance of
factors outside the executive’s control need to be assessed and a determination made as to
whether or not such factors should affect the incentive payout.
Incentives must not only help the organization achieve its mission and vision but also
must be consistent with the culture of the organization. In addition, the relative importance
of short- and long-term incentives must be consistent with the product lifecycle. It would be
inconsistent to put strong emphasis on long-term incentives when the lifecycle is a year or
less, and the reverse would also be true.
For short-term incentives, designers must weight the importance of individual contribu-
tions versus group performance. Individual plans have a number of advantages. They include
alignment between group objectives and individual performance, a defined link between
performance and pay, and a “performance counts” culture. Disadvantages could include too
much emphasis on individual outcomes, an invalid and/or unreliable measurement system,
and difficulties in accurately budgeting payouts.
Advantages of Incentive Pay. The overriding advantage of incentive pay is that it meets
the objective of pay for performance. In other words, payment will be in direct relation to
attainment of identified objectives. When these objectives are financial, it lowers pay for poor
financial performance and raises it for good financial performance. The absence of incentive
pay is the most costly to the organization for poor performers (because of fixed pay) and the
least expensive for good performers (again because of fixed pay).
Disadvantages of Incentive Pay. Designing and maintaining an effective plan is time consum-
ing. Additionally, plan designers run the risk of not effectively focusing efforts on appropriate
objectives, using the wrong measurements, or running counter to the desired corporate culture.
Below is a brief list of some common arguments against incentive pay plans, followed by
counterarguments.
• Incentives discourage teamwork and cooperation. (This can be minimized by establish-
ing shared goals/objectives.)
• Incentives do not make high performers work harder. (No one suggests they will work
harder; incentives simply ensure they put their efforts where they are needed.)
• Incentives punish those who do not meet their objectives/goals. (Underperformers still
have their salary, assuming their performance is not so bad as to result in termination.
Therefore, they are not punished; they are simply not rewarded for not meeting
expectations.)
• Incentives create a risk-aversion mindset. (It requires a real effort on the part of raters
and ratees to ensure the goals and objectives have sufficient stretch.)
After this introspective analysis, if the negatives outweigh the positives, one is probably
better off working simply with salary, employee benefits, and perquisites. If not, it is time to
determine what plans are most appropriate.

The Ideal Plan
Having reviewed the five compensation elements in some detail in the previous chapters, and
examined one’s willingness to use incentive pay, it’s time to see what forms of these elements