Making pay for performance work

34 Pages·2013·1.03 MB·English

Making pay for performance work
Towers Watson’s Autumn Conference
Short-Term Incentives
Alasdair Wood & Beth Powell
3 October 2013

© 2013 Towers Watson. All rights reserved.
Why do short-term incentives exist?

To tie people costs to affordability/profits
The number of reasons
 and importance of each
To share in business success / foster sense of
reason will vary by
inclusion
company, and even
 employees group, based
To focus employees on specific goals and behaviours
on variables such as:


To motivate employees to perform better in order to • Company philosophy
receive higher pay and values
• Employee / union

To provide fair levels of pay reflecting an employee’s
perspectives
individual contributions
• Impact of marginal
increases in

To attract high-performing individuals to the
individual effort on
organisation
business
performance

And therefore – to be market competitive in terms of
structure of pay
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The premise behind short-term incentives
Increase in Increase in
Short-Term
Discretionary Business
Incentives
Effort Results
Expectancy Theory

An increase in effort will lead to attainment of desired performance which
leads to receipt of fair reward that is valued by the recipient

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Question for Group
Do short-term incentives motivate your employees to
perform better?
4
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Why are short-term incentives still important when long-term
business success is the key objective?
Although most industries operate according to a long-term business

strategy, short-term incentives are still critical because:
It is easier to set annual targets and objectives than multi-year ones

It is easier to measure annual performance than multi-year

performance
Employees rely on receiving regular payments for personal

budgeting purposes
The decisions that most employees make most of the time impact

business performance within a one-year timeframe (exceptions
include executives and planning department)
Employees may not be in same position or even with same

employer over multi-year period
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The latest trends in Short-term Incentives
The incentive Profit Individual
award
pool

is the most commonly used
payments
metric used to determine
is typically determined using
bonus pay-out levels for tiered
financial and non-financial
and organisational wide plans,
methods for tiered plans, pure are the same for most
and individual performance
financial results for organisation-wide plans but
rating from the Performance
organisational wide plans and more differentiated in other
Appraisal system for individual
for individual incentive plans plan types
incentive plans
have a budgeted approach
using a sum of targets
A threshold
of performance or a 94%
discretionary of companies award
of 70% – performance payment in cash and
threshold are the two only 8% defer the
most common award
80%
scenarios
of companies only pay
someone a bonus if they
0% and represent the 1/3
are in employment on the
median percentages
date the bonus is paid
of target that a low

and high performer of companies have
150%
typically receive introduced new plans and
respectively have the same focus for
the coming 2 to 3 years
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Design parameters to consider in incentive plans
Pay-out Eligibility
• Who should be
Payout schedule

eligible?
Deferred

• Segmentation
Cash/shares

Funding Budgeted Performance criteria
 Financial

amounts
Non-financial

Profit share
 Group, BU,

Funding above
 individual
a minimum
return
Target setting

 Payout curve  Absolute/relative
 Link to  Time period (LTI) Performance
performance
levels measurement
Calibration

Targets

Minimum
 weighting
Maximum
 Additive/

Target
 multiplicative
Quantum
Link and weights
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Potential combinations
Design Decisions Some alternatives
Participation Executives Only
1.
Executives & Mid-Managers 3
2.
All Employees
3.
x
Performance Criteria Group Sales
1.
Group Profit
2.
5
Business Unit financials
3.
Milestone achievements
4. x
Individual Behaviours
5.
Performance Measurement Relative to peers
1. 2
Relative to budget
2.
x
Links & weights Additive
1.
Multiplicative
2. 3 = 6,480 potential
Matrix
3.
x STI designs!
Quantum Market aligned
1.
Based on funding pool 3
2.
Same for all
3.
x
Calibration Market aligned
1.
Based on funding pool 3
2.
Same for all
3.
x
Funding Sum of targets
1.
Based on profit pool 2
2.
Pay-out Quarterly x
1.
Annual Cash award
2. 4
Shares
3.
4. Deferred cash 8
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Eligibility
Most likely to use a Group-
based performance measure
and have a portion deferred
into shares
Executives
Most likely to use an
Tiered Leaders
Individual-based
incentive
performance measure
plans
most
common Managers
Most likely to be
segmented by function,
e.g. sales, critical roles
Professionals
Most likely to have team
bonuses (but still only
Manual / Clerical Staff used by c. 15%
companies)
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Question for Group
Has your company made any changes to eligibility
levels in the last five years?
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