Many organisations communicate a target incentive value to employees, as part of their remuneration structure. It is reasonable for an employee to assume this means that, if they and their organisation achieve about what is expected on average, then their long-run average incentive pay-out will be in the vicinity of target.
However, we have found that very few organisations test their cash incentive pay-out schedules rigorously or know whether their design is inherently biased towards over-paying or under-paying over time or in specific performance scenarios. Some organisations find themselves having to address this issue in the wake of a shareholder backlash against perceived overly generous bonuses. Others have the opposite problem, being unable to engage and retain key talent because of incentive plans which have too many hurdles and pay too little.
This white paper outlines a methodology for developing properly balanced incentive pay-out schedules which give real meaning to the term ‘target incentive’.