A recently published survey on annual incentive plans for top company officers (commonly referred to as MIPs, or management incentive plans) by Pearl Meyer & Partners provides an interesting snapshot of prevalent practice in design for these vehicles. The survey features 140 organizations, about 60% of whom are publicly held for-profits, the other 40% of whom are a mix of closely held, private and not-for-profit entities.
So what is the state of the MIP? A few interesting outtakes from the survey:
Target-based approaches are most popular, particularly among public companies. In a target-based plan, participants are assigned a target bonus opportunity and actual awards vary from target based on the level of goal achievement. In a somewhat distant second place are formula-based pool approaches; these are more prevalent in closely/privately held and not-for-profit organizations than their public counterparts. Discretionary plans fall into third place.
Target financial performance for plans is typically set at "budget". In setting performance goals and levels for financial metrics, the most common approach (62% of surveyed organizations) is to set target at the internal budget or plan level.
Maximum bonus opportunities varies by organizational size, with smaller companies being more "conservative" about potential upside. Larger companies (revenues over $1 Billion) most commonly set the maximum bonus opportunity at 200% of target. Smaller companies (revenues under $1 Billion) typically have maximum bonus opportunities of either 125% or 150% of the target amount.
Only a minority of organizations allow participants to earn bonuses regardless of financial results. About one-third of participants report that bonuses may be paid out even if overall financial results fall below the minimum/threshold level. Another one-third report that bonuses can be earned based on non-financial results, but only if a threshold financial goal is met (a design feature often referred to as a "circuit breaker").
Most companies do consider individual performance in bonus determination. The largest share of those who do consider individual performance - which comprises 50% of all participants - use individual performance as a "modifier" on results in financial and other areas.
As always, while overall trends are interesting and informative, bear in mind that prevalent practice is not necessarily the best practice for your organization.
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