‘Strike Zone’ Payout Curve for Executive Incentives

Goal Setting

Goal setting is the most important and challenging aspect of annual and long-term incentive design, says Harris, who is Managing Director at Frederic W. Cook & Co. Harris was joined by Ron Miller, Head of Global Rewards, Mobility, M&A, E.I. du Pont de Nemours and Company, in a presentation at the WorldatWork Total Rewards Conference and Exhibition in Philadelphia.

Here are some of Harris’s guidelines:

Probability of Achievement: An effective incentive design should pay at:

• Threshold: 80% to 90% of the time—that is, the threshold goal should be very achievable but not guaranteed.
• Target: 50% to 60% of the time—reaching target requires stretch performance.
• Maximum: 10% to 20% of the time—maximum is very difficult but possible to achieve.

Recent Payout Activity: Annual and long-term incentive performance goals are generally calibrated to pay near or above target levels. Annual and long-term incentive performance ranges should align with probability of achievement guidelines.

Traditional Incentive Payout Curve

Harris diagrams the traditional payout curve like this:

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Innovation Tip: “Strike Zone”

If setting a precise target is challenging, says Harris, set up a “strike zone” around the target. The payout curve around target is flattened to account for inherent error in the target-setting process.

Innovation Tip: Flatten and Stretch the Curve

Consider stretching the performance range and flatten the payout curve to account for large swings in performance during uncertain business conditions. The target remains the same but probability of a payout on the low end is greater, thereby “keeping participants’ heads in the game.” Conversely, additional performance is required for maximum payout.

Executive Benefits

As far as executive benefits are concerned, Harris says that there has been a significant reduction in their prevalence and value in recent years and the decline continues.

Because of pressure from proxy advisory services and other governance groups, the focus now is more on direct compensation for shareholder linkage, says Harris. He has seen less use of:

• Supplemental life and medical coverage
• Clubs, cars, and planes

And

• Contracts vs. change-in-control or severance policies
• Benefits offering risk mitigation: financial counseling and executive physicals

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Participate in BLR’s November 14 interactive webinar, and you’ll learn:

• How to determine what kinds of incentives and compensation work for each sales team member, including sales representatives, sales managers, and those handling major accounts and indirect sales
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• Tips for creating effective incentive plans for sales teams
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• The main reasons why sales employees go stale or jump ship to work for a competitor—and how to prevent it
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Thursday, November 14, 2013

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10:30 a.m. (Pacific)

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This program has been approved for up to 1.5 recertification credit hours through the Human Resource Certification Institute (HRCI).

Join us on November 14—you’ll get the in-depth Compensating Sales Professionals: Providing the Right Incentives to Keep Employees Focused on Your Organization’s Mission and Brand webcast AND you’ll get all of your particular questions answered by our experts.

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Train Your Entire Staff

As with all BLR/HRhero webcasts:

• Train all the staff you can fit around a conference phone.
• You can get your (and their) specific phoned-in or emailed questions answered in the Q&A session that follows the presentation.