4. The Design and Use of Short Term Variable Pay Plans

Variable pay plans are an integral part of all executive compensation
plans, and are commonly viewed as playing a key role for
motivating successful performance. Often linked to the company’s
annual budgeting and performance management process, and with
a typical timeframe for potential payout of one year or less, compensation
designers and executives give a great deal of attention to this
important element of pay. Its importance notwithstanding, the
chapter’s author notes that, despite best intentions, many incentive
plans ultimately fail, and for reasons that are often readily identi-
fiable and preventable.

The author initially explains there are several types of variable
pay plans, but places the focus of the chapter on the most prevalent
form of variable pay plan for executives, the annual incentive plan.
The chapter covers some of the important issues that must be thought
through in designing or revising an executive annual incentive plan;
these include determining plan participation, selecting performance
measures and standards of performance, determining the pay versus
performance schedule, and selecting the timeframe for payout and
method for funding the plan payments. The author describes the
importance of each issue, and provides examples of common plan
design features with an explanation as to the business context that
might lead to that particular solution.

The final sections of the chapter detail a number of the most
common reasons that incentive plans fail—some are technical in
nature, while others relate to how the plan was designed, internally
positioned and/or communicated. Sample plan templates and spreadsheets
for modeling pay outs are included on the CD. —Editors



In stock and shipping next business day. U.S. residents can order the
542 page casebound book, including templates and sample documents on CD,
direct from the Publisher for $99.95. The book can also be ordered through any
retail store by the title Executive Compensation: The Professional's Guide to Current
Issues & Practices or by its ISBN number: 1-893190-25-0.