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Review your annual pay strategy through a wider lens

Compensation Strategy & Design

By Hatti Johansson and Tatjana Ricketts | April 23, 2019

As part of your company’s compensation strategy planning discussions, ask yourself whether your annual incentive plan objectives align with your reward strategy and pay-for-performance principles.

To attract, engage and retain critical-skill and top-performing talent, it is key to connect your Total Rewards strategy with the workforce you need. At the same time, your Total Rewards strategy should align with your company objectives and talent priorities.

Competitive reward programs based on decision-quality data serve as the foundation for open conversations with your workforce about pay decisions. At the same time, they equip managers with purposeful and actionable insights to explain the rationale behind pay decisions in the context of their broader reward strategy.

As part of your company’s compensation strategy planning discussions, ask yourself whether your annual incentive plan objectives align with your reward strategy and pay-for-performance principles. Determine whether your plan as designed enables your talent to achieve short-term business objectives and is fit for purpose, or whether you need to introduce changes or alternative design approaches as a means to foster engagement, increase performance within your workforce, drive near-term business objectives and align with your longer-term business strategy.

Recognize that an effective incentive program design that aligns with company business objectives and talent priorities will resonate with your employees and drive success.

Now is the time to act. Review your annual incentive plan design(s).

Conduct a market scan to review design market practices. Gather insights on what plan design features are already fit for purpose and what enhancements, if any, may lend themselves to your company becoming, if not remaining, an employer of choice. Make it a priority.

Reflect on these five points during your incentive plan discussions. Pressure-test them during your compensation cycle. After all, the effective design, delivery and execution of reward strategies and programs result in stronger employee engagement and significant business value.

1. Eligibility: Determine annual incentive plan eligibility based on market norms alongside one’s ability to impact the achievement of financial and nonfinancial objectives.

Ask yourself:

  1. What eligibility criteria are used to determine plan participation?
  2. What criteria should be used?
  3. Should there be one common system for all eligible employees or different systems for different target groups?
  4. Do eligible employees understand how their behaviors drive business performance?

2. Metrics and levels of metric measurement: Take time to understand your sector and your company goals, then select metrics accordingly.

Ask yourself:

  1. What metrics are used by your peers?
  2. What metrics are investors tracking?
  3. Are metrics various or limited in number?
  4. Are metrics transparent and easy to understand?
  5. Can employees impact the metrics used?
  6. Does your annual incentive plan as designed enable your talent to achieve business objectives?
  7. Do your metrics provide the desired line of sight and focus to workforce and to shareholders?

3. Performance ranges: Set the right target goals and calibrate the optimal performance ranges; use predictive analytics to model performance targets and ranges that are best fit for purpose through forecast performance simulations.

Ask yourself:

  1. Are your target goals set properly to drive success?
  2. Are your target goals viewed as challenging yet realistic?
  3. Are your target goals striking the right balance between meeting stakeholder expectations and engaging your workforce?
  4. Are your pay outcomes aligned with actual and predicted performance?

4. Funding: Ensure you have the proper incentive plan funding mechanism in place and communicate how your plan is funded, in good times and bad.

Ask yourself:

  1. Does your funding approach work for your company and offer proper transparency?
  2. Is funding based solely on results achieved or also on how results are achieved?
  3. Is funding understood among the entire annual incentive eligible population?
  4. How do you tie funding to payouts?

5. Calculation of payout: Work to ensure that pay and performance are within a realizable range of alignment.

Ask yourself:

  1. Are you paying appropriately for performance achieved?
  2. Is pay appropriate as measured by performance relative to peers?
  3. Is payout determined by a robust performance management system or more of a formula-driven calculation?
  4. Does individual performance impact award payout? If so, how and to what degree?
  5. Is discretion used to evaluate performance and payouts? If so, how?

This is just a sampling of the types of questions you’ll be able to answer using insights from the new Willis Towers Watson Annual Incentive Plan Design Survey which provides valuable data that your organization can leverage to create effective incentive pay programs. We offer in-depth coverage of annual incentive plan design practices as well as current and historical payout and performance data.

Visit us for survey report details and purchase options. The report is available in the United States and Canada.

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