A Shift in Thinking for 2009 Bonus Plan Design

In their article "Executive Compensation in a Troubled Economy: Different Thinking for Different Times", DolmatConnell & Partners suggests two fundamental shifts in thinking relative to bonus plan design for a time (i.e., now) when there is little visibility into where the economy or even individual firm financials are headed over the next six to twelve months.

From the article:

• Consider using two six-month plans or even quarterly plans instead of an annual plan.  This shortened window provides both increased visibility and the ability to reforecast and reset targets.

• Consider a lessened focus on financial metrics and more emphasis on the achievement of key non-financial objectives that will improve the health and competitive positioning of the firm.  With financial visibility nearly unknown, there is a way to provide a focus on necessary strategic accomplishments in order to be well-positioned when economic recovery happens.

I think the authors are right to push us out of our typical plan design box given today's economic turbulence - but I think caution and balance are still the order of the day.  Reducing incentive timeframes to semi-annual or even quarterly periods probably makes sense given the business uncertainty so many organizations are facing - but the associated emphasis on shorter-term decision making concerns me.  To some extent, this potential short-sightedness is offset by the accompanying suggestion to shift emphasis to non-financial metrics that focus on an investment in the organization's future performance - these kinds of metrics are typically longer term by their nature.  Even here, though, balance will remain important - financial metrics must still remain in the picture to ensure that the organization is in a position to make good on its award promises.

Comments

[E James (Jim) Brennan]

Not to rain on the parade, but there's nothing new about those proposals. Those are classic old good ideas. What might possibly be new is the slightly better environment today to win approval for such "revolutionary non-traditional" recommendations. In desperate times when targets change rapidly, there is occasionally more willingness among financial controllers to accept such logical reasonable evergreen and open approaches in place of their usual fixation on immutable annual financial metrics.

It is the additional required elements of uncertainty, guaranteed change and loss of control that usually makes those superior approaches repugnant to committees dominated by bean-counters. Real life tends to be messier than a balance sheet.

[Ann Bares]

Jim:

Real life today is also a tiny bit messier than real life has historically been. And I agree, these aren't earthbreaking new ideas - in fact, I have recommended these to a number of clients in the past for situational reasons (as, I'm certain, have other pay consultants). What's changed is the fact that they are now being raised and considered as a more widespread tactic - a sign of the times for sure.

Thanks for the comment!