Steps to a Great Incentive Plan

July Benefits Installment by Jim Moniz

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A performance based incentive plan is one element of compensation that most companies recognize as vital to the remuneration mix, but developing such an effective program requires some thought and effort.

To get things moving, you first have to define the specific goals of an incentive plan – are you seeking increased sales, improved customer retention, certain margins? Before you put a rewards strategy in place understand what you’re trying to achieve.

Once key result areas have been determined, identify which employees are best positioned to make these results happen; not every employee will be able to fulfill these initiatives.

Next comes quantifying the value created if incentive objectives are met – in other words, what will be the financial result for shareholders? This process typically requires construction of a model that projects base, target and superior result thresholds.

Once the economic value has been determined, you have to figure out the amount you will share with those employees who helped create the upswing.

First determine an acceptable “target” pay-for-performance return and then earmark an achievable “superior” return. Once those two measures are identified you can better establish an incentive goal.

The next step is to determine a standard that defines the potential value in current terms. The potential reward, then, might be stated as a percentage of contributors’ current salary – of course, the big question is the percentage amount. Incentive plan targets that combine the short and long term will likely be in the 60% to 80% of salary range for top managers and between 40% and 80% for second tier managers.

Establishing tiers comes next. After all, not everyone had an equal part in creating increased value. A business needs to define tier levels and assign participating employees – by establishing different tiers you can assign greater potential value to those who will have the greatest impact.

Weighting – or determining how much of a reward should be assigned to the achievement of various categories of expectations – is the sidekick to the tier concept. Weighting should be based on how much of an employee’s role impacted categories.

Determining allocation is the next step. You need to decide when awards will be paid out…at the end of the quarter, end of year and/or sometime down the longer road. Typically, a percentage of total incentives are paid annually and a percentage rewarded in the future.

The final step deals with the long-term portion of the incentive plan. This could take any number of forms. For instance, it could be held in a pool; credited with interest or investment earnings; or treated as a stock or phantom stock incentive.

With this type of incentive program in place, shareholders know the precise value accrued before managers earn incentives; they know the percentage of future growth shared with the management team; and they also know managers will be rewarded for achieving specific and measurable results.

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About our Benefits Installment Author:

James E. (Jim) Moniz, CEO of Northeast VisionLink, a Massachusetts firm that specializes in structuring executive compensation. James E. Moniz is a national speaker on the topic of wealth management and on executive compensation.

Employer Turnaround

According to a new poll conducted by Careerbuilder, “72% of employers are taking steps to strengthen their employment brand to prepare for when the economy turns around.”

Of course, the first major take away is that there seems to be something a return of confidence in the U.S. Market. That's good news.

Another major take away is that if your company is looking to grow coming out of this recession, then you better be one of the above 72% .

So, what exactly are these 72% up to?

• Outlining potential career paths for current and future employees.
• Offering more employee recognition programs.
• Offering more flexible work schedules.
• Revising job listings to emphasize a positive work culture.
• Revising recruitment materials.
• Revamping their company career sites.
  

These things make you visible, competitive and desirable. Are you doing these things?

Performance, Compensation and the Recession

June Benefits Installment by Jim Moniz

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One of the key characteristics of companies that move ahead while others are falling behind is the ability to turn obstacles into opportunities.

High performance organizations that advance, even in the wake of a recession, have the foresight and courage to make seemingly counter-intuitive decisions during difficult economic cycles. Companies that adopt this strategic approach can discover opportunities during times when competitors are in defensive mode.

For example, during recessionary periods, high performance companies recognize and take advantage of the following:

• Weaker competition will fade away, creating opportunities to acquire higher market share
  
• Top talent becomes more available in the marketplace and typically at more affordable salaries
  
• Capital expenditures can be re-focused in anticipation of recovery
  
• Acquisitions prospects become more accessible
  
• A challenging economy often forces a company to look closely at it’s compensation structure and subsequently revamp it, positioning the organization more positively not only during the recessionary period but also following it
  

Savvy companies recognize that in both good times and bad times, the ultimate key to success is their talent pool. Likewise, they are also well aware that it is precisely at the trough of a recession that the labor pool will be at its deepest and wage pressures at their lightest.

Regardless of the economic climate, the highest performance organizations look to hire those they believe will commit to the company’s vision and strategy – in other words they want top talent with an ownership, not an entitlement mentality.

So, what type of compensation package does top talent respond to?

The most talented individuals want to participate in an opportunity that rewards them for their performance – they want to clearly see a relationship between how they perform and how they are compensated.

Top-tier employees also recognize and respect the balance that inherently exists between guaranteed and incentive compensation and long-term versus short-term pay. They understand the economic outcomes the company needs to achieve for sustainability and growth and furthermore they are aware that current economic conditions will impact the shape and form compensation will take now…a shape and form that may shift when times are better.

While top talent may be willing to take a little less in their paychecks when jobs are scarce, in general terms a compensation structure that will attract high echelon workers will address the primary needs of sustainable cash flow; security; and wealth accumulation.

Understanding these elements, a company must formulate a compensation philosophy that not only addresses current economic cycles, but takes the longer range into consideration. The compensation philosophy of a high performance company typically includes market salaries; upsides/bonuses for exceeding annual expectations; long-term wealth accumulation opportunities; a flexible benefit structure that bends and shifts to both strong and weaker economic years.

Compensation philosophies of this ilk can absorb adjustments as the company faces various challenges, recessionary or otherwise. For example, when business is on an upward trend, salaries are at or are even slightly above market; short-term incentives are equal to percent of salary; and long-term awards are based on market guidelines. Conversely, when business is trending down, salaries are at or slightly below market; short-term incentives are minimal; and long-term awards are higher than market levels.

Businesses that adopt these compensation philosophies have the capability of interjecting practical solutions when the economic flow is downward.

For example, during recessionary periods, a company with a thoughtful compensation philosophy may offer “sabbatical” leaves to certain employees instead of a cut and dried layoff. Such a leave will reduce or suspend salary, but keep employees eligible for long-term benefits and wealth building programs.

Tiered pay cuts, as opposed to the feared “reduction in force” are another approach to cutting costs, while retaining key employees during challenging economic times. Top quality team players will recognize these adjustments in salaries as a necessary means to maintain jobs.

And during poorer performance cycles, a company might eliminate bonuses or raises, instead granting additional stock options.

Ultimately, companies, regardless of the shape of the economy, must have exceptional people on staff – employees who are aware that shifting financial circumstances may redefine their compensation and short term rewards, but who have the desire to maintain their focus within the organization knowing that the pendulum will eventually swing back toward better times.

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About our Benefits Installment Author:

James E. (Jim) Moniz, CEO of Northeast VisionLink, a Massachusetts firm that specializes in structuring executive compensation. James E. Moniz is a national speaker on the topic of wealth management and on executive compensation.