getting it right variable compensation

8/13/2019 Getting It Right Variable Compensation

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Getting It RightPaying for PerformanceThrough Variable PayKen Abosch

Marilu Malague


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Your Presenter(s)Ken Abosch, Lincolnshire Office

[email protected]

Marilu Malague, Woodlands Office

[email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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Bottom Line on TopVariable pay has become the primary

mechanism to pay for performance todayThere are sub-optimal practices thatare inhibiting the effectiveness of

variable pay plansNow is the time to Get it Right!


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Road Map for Todays DiscussionVariable Pays Role in Pay forPerformance Today

Learning From Our Mistakes

Getting it Right:

Criteria and ToolsYour Questions!


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Sources of InformationVariable CompensationMeasurement

Broad-based plans

Created in 1996

More than 380 cashvariable pay plans

300 companies

1.9M employees

Plan characteristic drivendatabase

Prevalence

Effectiveness

Hewitt Salary IncreaseSurvey

Created in 1976

Fortune 1000 companies

1,156 companies in 2009Merit/overall salaryincreases

Salary structure movementVariable compensation

Special topics


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Variable Pays Role inPay for Performance Today


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Use of Variable Pay

47%

70%

88%

0%

10%20%

30%

40%

50%60%

70%

80%

90%100%

20 Years Ago 10 Years Ago Today

Percent of Companies With a Variable Pay Plan

Source: Hewitt Salary Increase Survey 19902009


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Participation in Variable Compensation

74%

41%

81%

52%

0%10%

20%

30%

40%50%

60%

70%

80%

90%

100%

10 Years Ago Today

Prevalence in Variable Pay Plans By Employee Group

Salaried Exempt Salaried Nonexempt



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Increasing Line of Sight

35% 35%

13%

45%53%

28%20%

38%

64%

18%10%

0%

10%

20%

30%

40%

50%

60%

70%

80%90%

100%

20 Years Ago 10 Years Ago Today

Focus of Variable Pay Plans Based on Plan Type

Individual Performance Plans Business IncentivesCash Profit Sharing Gainsharing



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Growing Role of Individual Performance

17%

36%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

10 Years Ago Today

Inclusion of Individual Performance in Variable Pay Metrics

Source: Hewitt Variable Compensation Measurement

(VCM) database 20002009


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Projecting Future Budgeting

2.5%

11.8%

2.0%

16.0%

0%

2%

4%

6%

8%10%

12%

14%

16%18%

20%

Today 10 Years From Now

Percent of Payroll

Base Salary Increase Budget Variable Pay Budget



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Variable Pay Has Become a Global

Phenomenon

0 20 40 60 80 100


United StatesCanada

VenezuelaPuerto Rico

MexicoChile

BrazilArgentina

United KingdomSwitzerland

SwedenSpain

NetherlandsItaly

HungaryGermanyBelgium

AustriaThailand

TaiwanSingapore

PhilippinesMalaysia

KoreaJapan

IndiaHong Kong

ChinaAustralia


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Plan Weights

Employee With$50,000 Salary(5% Bonus Target)

Corporate 50% Net Income 25% $625

Revenue 25% $625

Business Unit 20%

Cash Flow 10% $250

Revenue 5% $125 Quality 2.5% $62.50

On-Time Delivery 2.5% $62.50

Department 20%

Safety 10% $125

Attendance 10% $125

Individual 10%

Attendance 2% $50

Project Completion 3% $75

Idea Creation 5% $125

100% $2,500



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$1.0M

$1.5M

$3.0M

$6.5M

Maximum

Target

Threshold

Funding

Funding Gap

Funding Required by PlanActual Available Funding


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Learning From Our MistakesCorporate

ResultsX X X X X

BusinessUnit Results

DepartmentResults

Individual

Results

X

Non-

exemptsEntry

ExemptsManagers Directors Executives


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Distribution of Total Payout as % of Targe t

010203040506070

0 % - 7 0 %

7 0 %

- 7 5 %

7 5 %

- 8 0 %

8 0 %

- 8 5 %

8 5 %

- 9 0 %

9 0 %

- 9 5 %

9 5 %

- 1 0 0

%

1 0 0 %

- 1 0 5

%

1 0 5 %

- 1 1 0

%

1 1 0 %

- 1 1 5

%

1 1 5 %

- 1 2 0

%

1 2 0 %

- 1 2 5

%

1 2 5 %

- 1 3 0

%

1 3 0 %

- 1 3 5

%

> 1 3 5

%

Total Payout as % of Target

# o

f I n c u m

b e n

t s

Company Perf as % of Goal


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2001

2002

2003

2004

2005

2006

2007

2008

2009

Business Performance

Bonus Payout


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Salary to Midpoint Comparison Bonus Payout Calculation


Grade

Midpoint

EmployeeSalary

$5,000

LessSalaryOver

Midpoint

Calculated

Bonus

Payment

$10,000

$5,000 $5,000

Actual

Bonus

Paid

=


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Create focuson required

results

Share insuccessesand failures

Facilitateideasand

improvements

Motivatedesirablebehaviors

Improveperformance

TheRole ofVariable

Pay


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Getting it Right:Criteria and Tools


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Getting It Right!It has never been more critical to get variable payright

Role in pay for performance

Increasing investments

Management expectations

External scrutiny


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Getting It Right: Diagnosis and Ongoing

Plan ValidationCommon goals with clear linkages

Controllable

Relevant to the Business As few as possible

As much direct influence on outcomes as possible

AccruedReflective of actual resultsIncreasing

Be as inclusive as possible

Competitive Appropriate pay at risk given line of sight and role

Minimal performance standards

Reflective of pay philosophy and cultureBalanced between realistic and challenging

Understandable and communicated goalsGoals shared before plan startsProgress reports

Not overly burdensomeShould include assessment of continuousimprovement

Plan Administration

Communication

Plan Mechanics

Participation Requirements

Targets

Eligibility

Funding

Line of Sight

Measures

Alignment


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Getting it Right: Performance MeasuresMany alternative design approaches and performance measures consideredMany alternative design approaches and performance measures considered

Additive

Opportunities(Funding = Sum of Required Payments)

MeasureA

MeasureB

MeasureC

+ + =

Earned

Award

Measure

AMeasure

BMeasure

C

+ + =

Earned

Award

Hybrids(Funding = Sum of Required

Payments Modified by Pool Size)

Multiplicative

Models(Funding = Sum of Required Payments)

MeasureA

MeasureB

MeasureC

X =

Earned

Award

X

MeasureA

MeasureB

MeasureC

+ X =

Earned

Award

Modifiers(Funding = Sum of Required Payments)

Award Pools(Funding = % of Profit)

Participant AParticipant B

Participant CParticipant D

DiscretionaryPlans

(No Specific Funding Mechanism)


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Recommendations

Expanded plan eligibility deeper in the organization (all exemptemployees)

Aligned the incentive plan and employees to the business goals

Getting it Right: Performance Measures

Job Level Incentive Target

Incentive Weighting

Individual Modifier Corporate Business Unit

Executives/

Sr. Vice Presidents 40% 100% N/A N/A

Vice Presidents 30% 70% 30% +/-

15%

Directors 20% 50% 50% +/-

25%

Managers 10% 40% 60% +/-

25%

Professionals/

Specialty Roles 5% 30% 70% +/-

35%

X =CorporateResults BusinessUnitResults+IndividualModifier

Annual

STIAward


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Diagnosis and Ongoing Plan Validation:

How One Plan Measured UpMeasures Corporate, 50%Individual, 50%Performance measured at Corporate and individual levelsMeasures aligned with Plan Objectives

Eligibility Exempt Employees >$60,000 85%

Exempt Employees


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Diagnosis and Ongoing Plan Validation

0

0.25

0.5

0.75

1

-2 -1 0 1 2 3 4 5 6 7 8 9 10

Measures Eligibility Funding Alignment

Line of Sight Plan Mechanics Targets Participation Requirements

Communication Plan Administration

Measures

Eligibility Funding Alignment

Line

of Sight

Plan

Mechanics

Targets

Participation

Requirements

Communication

PlanAdministration

VPI

Scorecard

Highly Effective

Zone

Effective

Zone

PartiallyEffective Zone

Ineffective

Zone


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Incentive Plan Scorecard

Overall ScoreOverall Score

Ineffective Zone Partially Effective Effective Zone Highly Effective Companys Score

0249 250499 500749 7501000 696

XYZ Company

0

Ineffective Zone

Partially Effective Zone Effective Zone

Highly Effective Zone

1000

The analysis details each design characteristic through speedometers

thatcompares to both best practice, our normative VCM Database, or a

selectedpeer group


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Getting It Right:

Answering Critical QuestionsHow does our

annual incentiveplan compare tobest practices?

How can we demonstrate toour leaders how our plan

supports business

objectives?

How does ourannual incentiveplan compare to

those in myindustry?

How can we

change our annualincentive plan to

make it moreeffective?

What characteristics havethe greatest impact on plan

effectiveness?


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Your Questions


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Your Presenter(s)Ken Abosch, Lincolnshire [email protected]

Marilu Malague, Woodlands Office

[email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]

getting it right variable compensation

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