Feeling the effects of a bear market, many organizations are grappling with the lacklustre financial performance. For some, that has led to significant cost cutting — including, in some instances, layoffs. In this kind of environment, some organizations are now contending with the fact annual incentive plans will be delivering much more modest payments, than in years past — if there’s a pay out at all.
A well-designed incentive plan typically defines a minimum level of financial performance that must be achieved if there is to be any pay out under the plan. This kind of mechanism is created via a “circuit breaker,” which can either be built into the funding of the bonus pool or serve as the threshold level of performance for one of the key plan measures.
However, while the financial realities of the business demand less robust incentive awards in the lean times, the prospect of delivering the bad news to the troops is a cause for concern for many leaders. How can they retain and motivate key talent when the coffers are empty.
Interestingly, Towers Perrin’s recent
Compensation Effectiveness Survey
revealed that when it comes to incentive pay, about one-third of the companies with circuit breakers still allow some bonuses to be paid under certain circumstances — at least partly negating the purpose of the circuit breaker. For such organizations, this is how they strike the balance between fiscal prudence and talent retention.
From a design perspective, there is nothing necessarily wrong with an incentive plan that occasionally does not pay out. Incentive plans are expected to drive organizational performance and reward employees for meeting and exceeding plan objectives. If corporate results are not met, why should organizations pay bonuses? It’s a difficult decision, which some organizations will need to deal with in the coming months.