Step 3: Develop a Draft Plan

In this step, the parts come together to create a plan that will support the organization’s Strategic business Plan in the most effective manner. The parts include:

- Participants;

- Basis for payment of awards (performance metrics and weightings);

- Form of payment (cash, stock, or combination);

- Timing of awards (current year, defined performance period, career-based, or deferred);

- Setting and performance targets and thresholds

- Award determination and funding; and

- Rules for administering the program

The plan should be designed with a degree of flexibility to recognize changes in business strategy, so that the entire plan need not be changed in this event. A key element of success here is to design a plan that has a clear focus for the achievement of the company’s goals, based on a consensus among the Board and Top Management.

Step 4: Modeling the New Plan

To anticipate how the plan may operate once implemented, the company should conduct a cost/benefit analysis to see how the executive will be rewarded under different performance scenarios. If they are performing at their level of expectation, they should be paid at the right level (typically at market), and vice-versa. A well-designed plan that was sufficiently modeled will help to motivate and retain a company’s key executives, and should also spotlight (and possibly eliminate) weaker members of the executive team.

Step 5: Implementation and Administration

Putting a new plan into operation requires a good deal of work and thorough communication, including a strong message from the Board top management that they unequivocally support the plan. This goes a long way ensuring that participants understand the organization’s commitment to the plan’s success. Communications should be targeted to the participants themselves, as well as the corporate staff that’s responsible for plan’s administration. The form of communication should vary for each audience, since each group has to understand it in a slightly different way.

When installing a new plan, careful attention should be paid to identifying and addressing transitional or phase-in issues, so as to not rankle the participants or demotivate them. Processes to transition to the new plan could include running parallel systems, grandfathering some performance objectives and other related issues. To ensure smooth implementation of the program and keep executives focused on desired results, an active system of communication and feedback should to continue to focus the executive’s attention on the desired results, an active system of communication and feedback should be established (obviously on a higher level than with programs covering the rank and file).

Top Management, the Compensation Committee and the Board should take the time to review performance against goals on a periodic basis so that they can identify areas for corrective action before the damage is done. Such a system continues to reinforce the company’s commitment to the plan’s success and can enhance the executive’s motivation and performance.

An executive compensation program requires a significant investment of time and resources; an appropriate communication mechanism will enhavnce the plan’s ability to accomplish its objectives and will in turn benefit both the organization (in increased performance) and the executive (with awards commensurate with that performance).

Step 6: Monitoring and Corrective Action

Once the plan is implemented, it will be easier to tell how effective it will be at focusing executive’s attention on the desired results. If the results don’t match up with expectations, the company needs to find out why and take remedial action. Be careful not to throw the baby out with the bathwater; redesign is an on-going process that must be carried out on a timely and continuous basis. If the plan is designed well and with sufficient flexibility, it may only need to be tweaked in order to shift the emphasis to the desired results.

About the Author:
Paul R. Dorf is the Managing Director of Compensation Resources, Inc. He is responsible for directing consulting services in all areas of executive compensation, short and long-term incentives, sales compensation, performance management systems, and pay-for-performance salary administration. He has over 40 years of Human Resource and Compensation experience and has held various executive positions with a number of large corporate organizations. He also has over 20 years of direct consulting experience as head of the Executive Compensation Consulting Practices for major accounting and actuarial/benefit consulting firms, including KPMG, Deloitte Touche Tohmatsu (formerly Touche Ross), and Kwasha Lipton.