Annual Incentive Plan Design

Short-term Cash Incentive Plan or Cash Bonus Plan

Drive Company Goals, Results and Growth. Sustain Employee Engagement. Influence Company and Employee Performance... and more

We can help you designing and implementing an incentive plan. Not a generic one, but one tailored specifically for your company. Below are some of the steps we will follow with examples.

Plan Objectives (examples)

Ability to influence the overall Company, Divisions, Segments, Business Units, Functions results
Transparency on the incentive plan target financial results
100% self-funded plan (some companies prefer budgeted plans)
Funding based on specific Company, Divisions, Segments, Business Units, Functions financial metrics
Payout based on individual performance
Documented market-aligned eligibility criteria

Performance Metrics

Identify the metrics based on your company's specific objectives, and based on the most common market sector metrics (e.g., Consumer Goods: EVA, Revenue), Services: Operating Income, EBITDA, etc.)
Determine if some, all or none of the Corporate metrics will fund bonuses at Division, Business Units or Function levels
Funding determined by the ability to influence business results (Corporate, Divisions, etc.)
Determine how much each of the metrics will fund the bonus (percent weighting)

Plan Funding and Funding Matrix

Self-funded: it pays for itself; funds a bonus pool once predefined metrics (e.g., Operating Income, EBITDA) results have been achieved
Funding: overall bonus pool calculated based on predefined metrics (e.g., Operating Income, EBITDA) performance
- no funding if results are below threshold
- pro-rated funding between results shown on funding matrix
- funding matrices for Corporate, Divisions and Business Units

Scorecards

Communicate performance metrics and targets to all plan participants
Different metrics, targets and funding weights based on participation level (Corporate, Division, etc.)
Track real-time performance and bonus funding
Excellent communication and tracking tool

Plan Payout

Differentiate incentive payout based on individual performance
- participant’s funded incentive amounts to be adjusted up or down based on individual performance
- determine payout for participants with unacceptable performance (e.g., no payout)
Payout adjustments managed within bonus pool and aggregate bonus payout cannot exceed aggregate bonus funding pool
Payout recommendations require roll-up manager review and approval, final approval provided by CEO

Payout Example:

Assuming a manager has three participants reporting to him and target bonuses, funding and performance rating are as shown on the table below.

The manager has the discretion to adjust up and down each participant funded incentive based on their individual performance. The manager will not be able to spend more than what was funded on an aggregate basis.

Plan Design, Approval and Rollout

We will engage any function or business leaders to ensure the appropriate design (CEO, CFO, COO, CHRO, Legal, etc.)
We will create any presentation or communication material to be shared with business leaders, the Compensation Committee or the Board of Directors for review and approval
We will create the rollout and change management plans to implement and communicate the plan(s) to participants

Our Collaborative Approach

We recommend that at least one of your HR team members participates in the whole process. Why? We want to make sure we train and develop our clients team members so they can take over this type of projects in the future. We are glad to continue participating and owning this project from end to end. However, we also believe that it is important that your HR team acquires the necessary knowledge about each project in which we engage. We have followed this approach during the past 10+ years, we are proud of it and enjoy the opportunity of developing and helping to grow the HR community's knowledge.

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