Getting appropriate "stretch" in incentive plans
Many of my Board Compensation Committees are concerned that any plan we have has sufficient “stretch” in its performance criteria … and I agree … but want to make sure we are also realistic, so that we do not lose the motivational power of that just out of reach carrot that a perfectly designed incentive plan offers….
As a way of possibly aiding your thinking about “stretch”, I wanted to share a concept we use in incentive design called “rational planning range”. RPR implies:
• That an organization’s Board approved strategic plan and budgets should drive everything …
• Rational Range idea is a planning concept, usually uncovered thru dialogue with CEO and CFO, as well as analysis of the organization’s past performance and current performance by industry peers : to given what we know, identify the full range possible performance that was included in recent Board approved budget … from least acceptable level if nothing goes our way, to expected or “budget”, to the absolute “home Run” if all goes our way.
• Any Incentive offerings typically should be for performances between expected and that absolute home run, and we only want to a share portion of that marginal gain … doing so makes incentives affordable and reasonable to “owners/investors”, and provides maximum motivational opportunity (i.e. while will require ‘extra effort’, are doable and within management’s control).
• RPR approach also implies capped rewards .. sharing within rational planning range … incentives are not commissions
Balance – also important to seek balance in your incentive plans … you are going to get what you ask for with an incentive plan, so make sure you knew what you asked for (above), and that it meets “safety and Soundness” criteria … typically by looking for balance between individual and team performance, as well as between production and the quality of that production.
I hope this info is helpful to your planning efforts. As I can assist our efforts in any way, please do not hesitate to let me know. Thank you
