The Advisors' Blog

While a recent research report from Pay Governance on incentive plan design focuses on companies in the industrial and energy sectors, there are helpful insights for any company that’s looking to avoid “performance goals that are either overly challenging (and, in some cases, unachievable) or quite the opposite, lacking rigor and just plain too easy in hindsight.”

The report provides considerations for both annual and long-term compensation, with the following practices highlighted for annual incentive plans:

Performance Metric Considerations: More metrics to measure performance. Use of a greater number of metrics reduces the focus on one or two metrics and therefore reduces the likelihood of a zero or maximum bonus payout. In addition, use of non-financial measures—such as operational, safety, and environmental metrics.

Performance Range Considerations: Wider performance ranges to accommodate swings in commodity prices and economic volatility, thus reducing the frequency of maximum or zero payouts.

Performance Measurement Considerations: Using partial year performance goals when the business outlook for the full year is uncertain. This typically involves the implementation of two shortened performance periods, or “First Half” and “Second Half” goals, to mitigate the uncertainty of setting full-year goals while still maintaining a single annual payout.

Performance Goal Setting Considerations: Use of a “target performance range.” Under this method, a company establishes a range around the target performance goal reflecting insights regarding expected commodity price volatility or economic performance.

Given the recent turbulence in the tech space, I wouldn’t be surprised if research would bear out that many have also used these levers to appropriately incentivize and retain exec talent in a rapidly changing environment.

— Meaghan Nelson