Short-Term Incentive Plan Design and Review
Alignment between pay and performance has become increasingly important especially during economic uncertainties; there is constant debate on whether incentives should be determined by a formula or discretion to increase alignment. Some companies are swinging back and forth in determining how employees should be incentivized.
Key Issues
- How to ensure bonus is market competitive?
- How to ensure alignment between pay and performance?
- How to address unpredictable environment?
- How to ensure bonus proposal is persuasive?
After comparing the listed advantages and challenges, it was discovered that formulaic and discretionary approaches are not mutually exclusive. A discretionary plan which incorporates some kind of a structure or a formulaic target bonus plan with discretionary adjustment can both serve as better alternatives.
The degree of discretion or formula applied will vary depending on:
- Development stage of the company
- Skills of decision makers
- Whether the team is sales or management focus
- Culture of the company
Related Links
- Pretium Incentive Practices Survey
- Is a formula better than Discretion in Paying Incentives?
- Differentiating Bonus with Performance