Pay for Performance - How to design a short term incentive plan? Caroline Yang

Transcription

1 Pay for Performance - How to design a short term incentive plan? Caroline Yang 1

2 Session Objectives This session will provide participants a high level overview of: Where to start when designing a short term incentive plan Identify the desired behaviours the incentive plan wants to drive Align company and individual performance with incentive pay Set the appropriate incentive target for different levels of employees holding different jobs Manage the program after implementation Take the mystery out of numbers! 2

3 What is a short term incentive plan? The Total Reward Package A formal variable pay plan has the following features: Objectives Eligibility criteria Target earnings for eligible employees Periodical typically annual or semi-annual Performance measures Process to determine payout Payout date 3

4 Why do we need an incentive plan? Considering the following scenarios: You are an HR consultant considering hiring your first employee to expand business You work for WestJet as the compensation specialist You work for Blackberry as the HR director 4

5 WestJet Compensation Philosophy prudent and well aligned with the airline s culture and values attraction and retention of talent ensuring strong ties between pay and performance 5

6 Blackberry Compensation Philosophy Maintain a world-class team Attract, motivate and retain exceptionally talented, high performing, entrepreneurial employees Establish a clear performance linkage aligning compensation to business performance Align to external market, but balance with simplicity and impact to the business Align short-term compensation to the Company s short-term objectives and outcomes Align long-term compensation to shareholder interests Appropriately manage risks arising from the Company s compensation policies and practices 6

7 Why do we need an incentive plan? Objectives of an incentive plan Attract, motivate and retain talent Align employee s effort with company performance and shareholder interest Align with value and culture, strategy Align with external market, simple, transparent 7

8 WestJet Short-term Incentive Plan Performance Measures Profit 75% Leadership 5% Safety 5% SPOT 5% (arrival within 15 minutes) Guest Experience 5% Cost 5% 8

9 Blackberry Short-term Incentive Plan Performance Measures Revenue 50% Earnings Per Share 25% Free Cash Flow 25% 9

10 Plan Design Two typical designs: A Base Salary X Target % X Company Performance X Individual Performance B Base Salary X Target % X ( Company Performance 50% + Individual Performance 50% ) 1. Company and individual performance split can be any combination, e.g. 50/50, 40/60, 70/30, etc. 2. Typically there is a minimum threshold, e.g. 50%, and maximum, e.g. 200%, on both company and individual performance. 10

11 Plan Design Base Salary Target Target $ Co. P. Ind. P. Payout 100,000 X 20% = 20,000 X 70% X 110% = 15, ,000 X 20% = 20,000 X 110% X 70% = 15, ,000 X 20% = 20,000 X 0% X 110% = 0 A Base Salary Target Target $ Co. P. Ind. P. Payout 100,000 X 20% = 20,000 X ( 70% + 110% ) / 2 = 18, ,000 X 20% = 20,000 X ( 110% + 70% ) / 2 = 18, ,000 X 20% = 20,000 X ( 0% + 110% ) / 2 = 11,000 B 11

12 Plan Design - Who is eligible, how much? Influence on Performance Line of Sight Company STI, 10% 20 50% Dept/Unit STI, 5% Base, 90% 10 30% STI, 25% Team or Work Group Base, 95% 5 15% STI, 15% Base, 75% Individual 3 8% Support Staff Professional Staff Base, 85% Middle Mgmt Sr. Mgmt Job Roles 12

13 In Summary Start from the compensation philosophy and the objectives of the plan Set performance criteria that drive the desired behaviour Consider financial risk and people risk in your design Set incentive target based on internal factor (employees line of sight) and external factor (market competitiveness) 13

14 E.g. Program Management Eligibility: all employees, target % varies Design: company performance + individual performance Communication town-hall meeting to communicate performance target and results Comp team calculates target payout based on business score Managed through excel, then system Managers determine individual performance and allocate individual payout, balance performance and budget Roll-up review by director and then VP of business unit Final approval and payout 14

15 Calculate Business Score Hudsons Bay s Performance Measures: Adjusted EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) E.g. $1,000,000 is the target, if achieving: $1,000,000 => 100% $750,000 => 75%; $1,250,000 => 125% $480,000 => 0 (because of 50% threshold) $2,100,000 => 200% (because of 200% cap) 15