“We’ve looked at hundreds of companies’ plans,” Dolmat-Connell says “I guess if you could boil it down, there are three key pieces of advice.” (Dolmat-Connell is president and CEO of compensation experts DolmatConnell, & Partners in Boston, Massachusetts.)
First of all, he says, make sure you don’t have uncapped plans.
Second, make sure you balance the short and long term. That was one of the problems at the financial institutions that got in trouble: The people were paid all in cash, every year.
“If you pay some of the compensation in cash and some of it in stock that people have to hold a certain amount of time, then they’re probably going to act in the better long-term interests of the company because they’ve personally got a lot of money at stake.”
Then, third (and this is being mandated quite a bit these days), have clawback provisions in the compensation program,” says Dolmat-Connell. “If there are restatements of the financials or any kind of unethical behavior, you need to have the ability to claw back the person’s compensation, both short and long term.”
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Preventive Measures
In order to mitigate some of the risk of incentive compensation plans, the team should do the following.
- Consider multiyear performance periods. This encourages longer-term thinking and, therefore, reduces risky behaviors.
- Examine any stock ownership and retention requirements you may have with the same perspective.
- Think about the option of bonus deferrals, where earned bonuses are paid out in a later year. These can also be effective, Dolmat-Connell says.
While none of these measures is perfect, they can encourage executives and salespeople to think about the overall, long-term interests of the company.
Dolmat-Connell says that your compensation consultant or legal counsel can help you develop a sound strategy for paying people in a way that encourages them to build the company but not to take excessive risks.
As a final tip, Dolmat-Connell suggests that you govern your compensation plans as if they—and you—will end up on the news.
Comp’s never easy, is it? There’s not a day goes by that there aren’t questions ranging from incentive compensation to wage and hour. More often than not they touch on devilish topics like FMLA intermittent leave, overtime, ADA accommodation.
You need a go-to resource, and our editors recommend the “everything-HR-in-one website,” HR.BLR.com. As an example of what you will find, here is a sample policy concerning incentive bonuses, excerpted from the full policy on the website:
Annual Bonus Paid Quarterly
Performance bonuses will be based on revenues from annual billings. This means that final bonus amounts are based on collected revenues using billable hours for the entire year. However, advance partial payments will be made quarterly. Every quarter employees will receive an advance of 70 percent of the bonus based on the performance for the quarter, with 30 percent being reserved for payment at the end of the bonus year. This 30 percent will generally be used for any adjustments due to the inability of the company to collect the revenue billed to the customer.
For example, the customer refuses to pay because the work quality was poor, the specifications of the project are not met, the billing hours are incorrect, or there are other problems with collection of revenue. Essentially, the bonus contains both a potential award and potential risk. It is a reward for selling additional services to a customer and thereby generating increased revenue. It is a risk if you sell unneeded services to the customer or if you sell services to a customer who does not pay.
The bonus year will be operated on a calendar year basis. Distributions will be made on the first day of the second month following the close of the respective quarter based on collections. Distributions at year end will be made on ______________ of the following year. Employees must be actively employed by DEF Group at the time of distribution in order to receive a bonus.
We should point out that this is just one of hundreds of sample policies on the site. (You’ll also find analysis of laws and issues, job descriptions, and complete training materials for hundreds of HR topics.)
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