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Pay for Performance - How to design a short term incentive plan?

Caroline Yang

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Session Objectives

This session will provide participants a high level overview of:

• Where to start when designing a short term incentive plan

• Identify the desired behaviours the incentive plan wants to drive

• Align company and individual performance with incentive pay

• Set the appropriate incentive target for different levels of employees holding different jobs

• Manage the program after implementation

• Take the mystery out of numbers!

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What is a short term incentive plan?

A formal variable pay plan has the following features: • Objectives • Eligibility criteria • Target earnings for eligible

employees • Periodical – typically

annual or semi-annual • Performance measures • Process to determine

payout • Payout date

The Total Reward Package

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Why do we need an incentive plan?

Considering the following scenarios:

• You are an HR consultant considering hiring your first employee to expand business

• You work for WestJet as the compensation specialist

• You work for Blackberry as the HR director

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WestJet Compensation Philosophy

• prudent and well aligned with the airline’s culture and values

• attraction and retention of talent

• ensuring strong ties between pay and performance

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Blackberry Compensation Philosophy • Maintain a world-class team

• Attract, motivate and retain exceptionally talented, high performing, entrepreneurial employees

• Establish a clear performance linkage aligning compensation to business performance

• Align to external market, but balance with simplicity and impact to the business

• Align short-term compensation to the Company’s short-term objectives and outcomes

• Align long-term compensation to shareholder interests

• Appropriately manage risks arising from the Company’s compensation policies and practices 2 Feb 2018 How to design a short term incentive plan

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Why do we need an incentive plan? Objectives of an incentive plan

• Attract, motivate and retain talent

• Align employee’s effort with company performance and shareholder interest

• Align with value and culture, strategy

• Align with external market, simple, transparent

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WestJet Short-term Incentive Plan

• Performance Measures

• Profit 75%

• Leadership 5%

• Safety 5%

• SPOT 5% (arrival within 15 minutes)

• Guest Experience 5%

• Cost 5%

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Blackberry Short-term Incentive Plan

• Performance Measures

• Revenue 50%

• Earnings Per Share 25%

• Free Cash Flow 25%

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Plan Design

Base Salary

X

Target %

X Company Performance

X Individual Performance

X ( Company

Performance 50%

+ Individual

Performance 50%

)

1. Company and individual performance split can be any combination, e.g. 50/50, 40/60, 70/30, etc.

2. Typically there is a minimum threshold , e.g. 50%, and maximum, e.g. 200%, on both company and individual performance.

Two typical designs:

Base Salary

Target %

X A

B

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Plan Design

A

B Base Salary Target Target $ Co. P. Ind. P. Payout

100,000 X 20% = 20,000 X ( 70% + 110% ) / 2 = 18,000

100,000 X 20% = 20,000 X ( 110% + 70% ) / 2 = 18,000

100,000 X 20% = 20,000 X ( 0% + 110% ) / 2 = 11,000

Base Salary Target Target $ Co. P. Ind. P. Payout

100,000 X 20% = 20,000 X 70% X 110% = 15,400

100,000 X 20% = 20,000 X 110% X 70% = 15,400

100,000 X 20% = 20,000 X 0% X 110% = 0

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Plan Design - Who is eligible, how much?

Support Staff Professional

Staff Middle Mgmt Sr. Mgmt

Individual

Team or Work

Group

Dept/Unit

Company

Line of Sight

3 – 8%

Influence on

Performance

Job Roles

5 – 15%

10 – 30%

20 – 50%

Base, 75%

STI, 25%

Base, 85%

STI, 15%

Base, 90%

STI, 10%

Base, 95%

STI, 5%

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In Summary

• Start from the compensation philosophy and the objectives of the plan

• Set performance criteria that drive the desired behaviour

• Consider financial risk and people risk in your design

• Set incentive target based on internal factor (employees line of sight) and external factor (market competitiveness)

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Program Management

E.g.

• Eligibility: all employees, target % varies

• Design: company performance + individual performance

• Communication – town-hall meeting to communicate performance target and results

• Comp team calculates target payout based on business score

• Managed through excel, then system

• Managers determine individual performance and allocate individual payout, balance performance and budget

• Roll-up review by director and then VP of business unit

• Final approval and payout

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Calculate Business Score

• Hudsons Bay’s Performance Measures: Adjusted EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization)

• E.g. $1,000,000 is the target, if achieving:

• $1,000,000 => 100%

• $750,000 => 75%; $1,250,000 => 125%

• $480,000 => 0 (because of 50% threshold)

• $2,100,000 => 200% (because of 200% cap)

2 Feb 2018 How to design a short term incentive plan