Overhauling Short-Term Incentive Plans to Strengthen Pay-for-Performance

Background

A well-established property development and investment company is competing with international and leading local peers for projects, capital and talent.

The company is lacking a clear linkage between corporate/team/individual performance and bonus payout, undermining strategic alignment and motivation.

Objectives

Differentiate incentive allocation based on performance to reinforce pay-for-performance.

Improve talent attraction and retention by tailoring specific reward strategy for different departments.

Establish a transparent incentive framework to ensure internal equity.

Process

Select a peer group based on the similarity of business model, scale and industry background.
Conduct compensation benchmarking for senior management and employees at different departments to assess the pay competitiveness.
Recommend tailored KPIs with defined performance-payout ranges for each department, establishing an objective basis for individual bonus calculation.
Develop a clear and transparent short-term incentive and performance adjustment mechanism to determine the size and allocation of departmental bonus pools.
Draft annual bonus plan rules detailing eligibility, KPI measurement, and critical provisions for deferral, forfeiture, and clawback to promote sustainable performance.

Result

By implementing a clear, transparent and performance-aligned compensation and incentive scheme, the company can achieve disciplined, long-term and sustainable growth.

Illustration - Bonus Pool: From Target Accrual to Performance-Adjusted Funding

The total bonus pool for each department is systematically derived through a two-stage funding mechanism, ensuring a direct link between incentive payouts and realized performance:

Stage 1: the sum of individual target bonus will be accrued as the initial bonus pools for the departments.
Stage 2: the initial bonus pools will be adjusted according to the achievement against pre-defined company and departmental KPIs.

Illustration - Designing the Performance-Payout Architecture

Performance and Payout Range

It is used as the basis for determining the actual bonus payout relative to the target opportunity.
A threshold performance ensures payouts are reserved for meaningful contributions to business objectives.
An extraordinary performance cap defines the maximum payout to incentivize exceeding targets while maintaining financial sustainability.

Size of actual bonus pool will change based on Company and department's KPI achievement

The final pool size is modulated by a performance multiplier based on the respective performance against company and department-specific KPIs.

Illustration - Bonus Allocation: Translating Pool to Individual Payout

After determining the size of actual bonus pool for each department, the next step is to allocate this pool to individual employees. The actual pool will be adjusted based on individual performance ratings to determine the final individual bonus payout.

This mechanism serves a critical dual purpose:

Differentiate bonus payouts according to performance ratings, robustly reinforcing pay-for-performance

Operate as a zero-sum exercise within the departmental pool, allowing for significant pay differentiation between outstanding and substandard performers without requiring additional budgetary outlay