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Creating & Administering your Variable pay strategy

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Presentation on theme: "Creating & Administering your Variable pay strategy"— Presentation transcript:

1 Creating & Administering your Variable pay strategy
Compensation 101 Creating & Administering your Variable pay strategy Consulting Inc.

2 Our Agenda Identifying your variable pay goals
Establishing eligibility Determining your cash compensation mix Identifying variable pay triggers Establishing variable pay formula Evaluating the program

3 Variable Pay goals OBJECTIVE: To increase company performance by focusing and shaping employee behaviour GOALS: Ensure performance targets reflect the behaviour and results that matter most Ensure rewards adequately reflect different levels of contribution and performance Ensure individual rewards align with corporate performance

4 Determining compensation mix
Career Level Base Pay Variable Pay Admin 95% 5% Professional / Technical 90% 10% Managers 85% 15% Directors 80% / 75% 20% / 25% Executive 70% / 60% / 50% 30% / 40% / 50%

5 Identifying variable pay triggers
Company financial performance Net income Profitability Other company metrics Competitive ranking Customer growth targets Safety Team performance Individual performance Results achievement Alignment with company values

6 Establishing the formula
Modifiers Thresholds Performance Multipliers

7 Establishing the formula
INTEGRATIVE – results in company and/or team performance modifying the individual’s reward. Company performance establishes pool available. If company achieves targets, pool available is 100%. 100% of pool reflects the amount needed to pay out 100% bonus targets to all employees. If company exceeds targets, pool available will exceed 100%, to the extent that financial results can support a higher overall payout.

8 Establishing the formula
INTEGRATIVE: Financial Target Payout NET INCOME $MM Admin P/T Mgmt Dir Exec 85% 0% 90% 4.0% 8.0% 12.0% 20.0% 32.0% 95% 4.5% 9.0% 13.5% 22.5% 36.0% 100% 5.0% 10.0% 15.0% 25.0% 40.0% 105% 5.5% 11.0% 16.5% 27.5% 44.0% 110% 6.0% 18.0% 30.0% 48.0% 115% 6.5% 13.0% 19.5% 32.5% 52.0% 120% 7.0% 14.0% 21.0% 35.0% 56.0%

9 Establishing the formula
INTEGRATIVE : Multipliers Corporate Performance Rating Bonus Multiplier 110% 1.2 100% 1 90% - Threshold 0.8 If the company achieved 110% of financial targets, then bonus pool would be 120% of budget. If the company just met threshold targets, then bonus pool would be 80% of budget. (Are qualifiers required?)

10 Establishing the formula
INTEGRATIVE : Multipliers Individual Performance Threshold Meets Exceeds Team Performance 50% 75% 100% Meets Targets 150% Exceeds Targets 125% 200% Individual and team performance combine together to establish payout.

11 Establishing the formula
INTEGRATIVE EXAMPLE 1 Employee eligible for 10% bonus. Company achieves 110% financial target Team achieves threshold targets. Individual meets targets. Payout = 10% x (120% x 75%) = 9% payout EXAMPLE 2 Employee eligible for 10% bonus. Company achieves 100% financial targets Team exceeds meets targets. Individual exceeds targets. Payout = 10% x (100% x 200%) = 20% payout

12 Establishing the formula
ADDITIVE – results in company and/or team performance adding together with individual performance to define the payout. Company performance comprises a percentage of the total eligible payout. Team performance comprises a percentage of the total eligible payout. Individual performance comprises a percentage of the total eligible payout.

13 Establishing the formula
ADDITIVE : Bonus Composition Career Level Individual Team Company TOTAL Administrative 85% 5% 10% 100% Professional / Technical 70% 20% Managers 50% 30% Directors 40% Executives Line of Sight helps determine weight

14 Establishing the formula
ADDITIVE : Multipliers are established Performance Rating Bonus Multiplier Does not meet 0% Threshold 50% Meets 100% Exceeds 200%

15 Establishing the formula
ADDITIVE EXAMPLE 1 Manager eligible for 10% bonus. Company exceeds targets. Team achieves threshold targets. Individual meets targets. Payout = 10% x 30% x 200% + 10% x 20% x 50% + 10% x 50% x 100% = 6% + 1% + 5% = 12% EXAMPLE 2 Company meets targets. Team exceeds targets. Individual achieves threshold targets. 10% x 30% x 100% + 10% x 20% x 200% + 10% x 50% x 50% = 3% + 4% + 2.5% = 9.5%

16 Establishing the formula
Is it shaping the right behaviours? Does it have integrity? Are managers effectively distinguishing between different levels of performance? Is there a correlation between cumulative individual/team and company performance? Is there a correlation between individual merit increases and bonus awards? Is it sustainable? Has it resulted in an entitlement attitude? Is it competitive?

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