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.
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: