November 14, 2018
Finding & Avoiding Perverse Incentives
– Broc Romanek
This memo from Farient Advisors is interesting. Here’s an excerpt:
Even when companies are careful about plan leverage in the performance range between threshold and maximum awards, they often plant a big incentive land mine right at the threshold. One of the most common compensation structures in the corporate world is to have between 25 percent and 50 percent of target awards suddenly cut in when a threshold level of performance is achieved. At this point, the pay-for-performance curve is not just steep, it is vertical. To managers, that might mean millions of bonus dollars for hitting their number, or zero if they fall a dollar short.