On the plate today: an incentive plan design primer covering the topic of performance gates.
Performance gates (also referred to as "hurdles", "tripwires", "qualifiers" and "knockouts") can play an important role in incentive plan design.
When an incentive plan includes a gate, there is no award payout unless a key measure -- usually not a measure included in the core plan design -- reaches a certain level. In other words, the organization must "pass through the gate" in order to activate the incentive plan. Gate measures are typically financial in nature; e.g., requiring a certain level of revenue, net income or EBITDA. In these cases, the purpose of the gate is to ensure that the organization has adequate funds to meet its most critical obligations before awards are paid out. For example, an incentive plan which rewards executives for accomplishing a set of individual objectives that reflect each role's contribution to the strategic plan might have a net income gate. This net income gate, in essence, dictates that the organization must attain a certain level of profitability before the executives earn awards for their individual achievements.
The opposite, in a sense, can be true as well. An incentive plan which is primarily driven by financial measures might have a customer satisfaction, customer retention or employee engagement measure as a gate.
Used thoughtfully, a gate is a design mechanism that can provide a sense of balance and security to an incentive plan. However, the use and establishment of gates must be handled with care and sensitivity. Setting a performance gate at too high a level can engender employee cynicism and mistrust, creating the perception that management can (and does) manipulate the plan to avoid paying out.
