Communicability! Key for Selecting Incentive Plan Measures

The times and trends are putting increasing pressure on us to step up our variable pay game.  It may mean thinking in new ways about the kinds of performance metrics we use in plan design.

I spoke with a local group of compensation professionals recently about the increased prominence of variable pay in the typical employee compensation package.  We agreed that asking employees to put more of their cash compensation at risk by tying it to performance - especially corporate or business unit performance - demands that we reciprocate with increased information and transparency about how that performance is being measured.

The challenge, as one member of the group pointed out, is that there can be genuine obstacles to the kind of transparency and information sharing that this kind of risk-sharing partnership requires.  One example might be that of a public company that is unable to share information on some of the financial measures in its incentive plan ahead of the organization's regular earnings reporting, for fear of creating insider trading issues.  As another example, you have the reluctance that leaders of many privately-held companies feel around sharing detailed financial information - and how many of these organizations tie annual awards to profitability only via a discretionary call made by the limited group of insiders who are privy to financial details. 

This suggests to me that we need to move communicability (which I will define as the capability of being easily communicated) up to the top of our list of criteria for variable pay and incentive plan measures - particularly for plans with broad participation.

Tying an increasing proportion of employees' take-home pay to performance on measures where we are constrained from openly sharing information is simply not a winning proposition going forward.  Employees - particularly the smartest and most talented - will not abide it.

The bar on variable pay design continues to rise!

Comments

[Margaret O'Hanlon]

Ann,this is a really important point to make about incentives and pay for performance. My own, career long disappointment with incentive plans is that they are so complicated and mathematically self referential (the multiplier applies to a percentage of a pool that's allocated in some cases in a step-wise fashion) that even though people can eventually do the math, the concepts are hard to keep connected to reality and anything you do on a daily basis. That was a long way of saying that the interdependence of the measures also need to be communicated effectively, and that's no easy task.

[Ann Bares]

Margaret:

Agreed - if we can't communicate how the measures work clearly - or if we can't even share information on them in the first place - then they aren't going to change anyone's behaviors or efforts.

Thanks for the comment!