The aim of a successful annual compensation program is to correlate pay with concrete measures of company performance. To achieve this objective, a well-crafted incentive plan must undergo a thorough process, involving the careful selection and weighting of performance metrics.
At Kavea, our suite of services for annual incentive plan design comprises of crafting or suggesting the restructuring of annual incentive programs to optimize employee motivation and propel the accomplishment of company goals and objectives. Outlining plan features and recommendations, encompassing formula versus discretionary targets, thresholds, maximums, payout timing, vehicles, plan metrics, and more. Skillful drafting of communication documents to effectively convey the nuances of the incentive plan.
In the course of implementing an incentive plan design within your company, best practices typically encompass the involvement of four distinct categories of stakeholders:
- Senior Management (often involving multiple team members in the design phase);
- The Compensation Committee;
- Representative from the Audit Committee (referred to as the “Audit Committee”); and
- Compensation Consultant (referred to as the “Consultant”).
Consequently, a pivotal question that often emerges throughout the design process is, “Who assumes the creative role, and who undertakes the critical evaluation?” The following delineates a roadmap for effectively assigning responsibilities.
- Step 1: Incentive Payout Targets, Threshold, and Maximum
Creation: Consultant
Critical Evaluation: Management & Compensation Committee - Step 2: Metric Selection
Creation: Management
Critical Evaluation: Compensation Committee, Audit Committee, and Consultant - Step 3: Measuring Performance
Creation: Management
Critical Evaluation: Compensation Committee, Audit Committee, and Consultant - Step 4: Senior Management Payouts
Creation: CEO
Critical Evaluation: Compensation Committee, Audit Committee, and Consultant - Step 5: Chief Executive Officer Payouts
Creation: Compensation Committee & Consultant
Critical Evaluation: Audit Committee & Full Board of Directors
