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?