COMPENSATION 101
CREATING & ADMINISTERING YOUR VARIABLE PAY
STRATEGY
Consulting Inc.
OUR AGENDA
1. Identifying your variable pay goals
2. Establishing eligibility
3. Determining your cash compensation mix
4. Identifying variable pay triggers
5. Establishing variable pay formula
6. Evaluating the program
VARIABLE PAY GOALS
OBJECTIVE: To increase company performance
by focusing and shaping employee behaviour
GOALS:
1)
Ensure performance targets reflect the behaviour
and results that matter most
2)
Ensure rewards adequately reflect different levels
of contribution and performance
3)
Ensure individual rewards align with corporate
performance
DETERMINING COMPENSATION MIX
Career Level
Base Pay
Variable Pay
Admin
95%
5%
Professional / Technical
90%
10%
Managers
85%
15%
Directors
80% / 75%
20% / 25%
Executive
70% / 60% / 50%
30% / 40% / 50%
IDENTIFYING VARIABLE PAY
TRIGGERS
1. Company financial performance
 Net income
 Profitability
2. Other company metrics
 Competitive ranking
 Customer growth targets
 Safety
3. Team performance
4. Individual performance


Results achievement
Alignment with company values
ESTABLISHING THE FORMULA
1. Modifiers
2. Thresholds
3. Performance Multipliers
ESTABLISHING THE FORMULA
INTEGRATIVE – results in company and/or team
performance modifying the individual’s reward.
Company performance establishes pool available.

If company achieves targets, pool available is 100%.
100% of pool reflects the amount needed to pay out
100% bonus targets to all employees.

If company exceeds targets, pool available will exceed
100%, to the extent that financial results can support a
higher overall payout.
ESTABLISHING THE FORMULA
INTEGRATIVE: Financial Target Payout
NET INCOME
$MM
Admin
P/T
Mgmt
Dir
Exec
85%
0%
0%
0%
0%
0%
90%
4.0%
8.0%
12.0%
20.0%
32.0%
95%
4.5%
9.0%
13.5%
22.5%
36.0%
100%
5.0%
10.0%
15.0%
25.0%
40.0%
105%
5.5%
11.0%
16.5%
27.5%
44.0%
110%
6.0%
12.0%
18.0%
30.0%
48.0%
115%
6.5%
13.0%
19.5%
32.5%
52.0%
120%
7.0%
14.0%
21.0%
35.0%
56.0%
ESTABLISHING THE FORMULA
INTEGRATIVE : Multipliers
Corporate Performance
Rating
Bonus Multiplier
110%
1.2
100%
1
90% - Threshold
0.8
If the company achieved 110% of financial targets, then
bonus pool would be 120% of budget.
If the company just met threshold targets, then bonus pool
would be 80% of budget. (Are qualifiers required?)
ESTABLISHING THE FORMULA
INTEGRATIVE : Multipliers
Team
Performance
Individual
Performance
Threshold
Meets
Exceeds
Threshold
50%
75%
100%
Meets
Targets
75%
100% 150%
Exceeds
Targets
100% 125% 200%
Individual and team performance combine together to
establish payout.
ESTABLISHING THE FORMULA
INTEGRATIVE
EXAMPLE 1
EXAMPLE 2

Employee eligible for 10% bonus.

Employee eligible for 10% bonus.

Company achieves 110%
financial target

Company achieves 100%
financial targets

Team achieves threshold targets.

Team exceeds meets targets.

Individual meets targets.

Individual exceeds targets.

Payout = 10% x (120% x 75%) =
9% payout

Payout = 10% x (100% x 200%) =
20% payout
ESTABLISHING THE FORMULA
ADDITIVE – results in company and/or team
performance adding together with individual
performance to define the payout.

Company performance comprises a percentage of
the total eligible payout.

Team performance comprises a percentage of the
total eligible payout.

Individual performance comprises a percentage of
the total eligible payout.
ESTABLISHING THE FORMULA
ADDITIVE : Bonus Composition
Career Level
Individual
Team
Company
TOTAL
Administrative
85%
5%
10%
100%
Professional / Technical
Managers
Directors
Executives
70%
50%
30%
10%
10%
20%
30%
40%
20%
30%
40%
50%
100%
100%
100%
100%
Line of Sight helps determine weight
ESTABLISHING THE FORMULA
ADDITIVE : Multipliers are established
Performance Rating
Bonus Multiplier
Does not meet
0%
Threshold
50%
Meets
100%
Exceeds
200%
ESTABLISHING THE FORMULA
ADDITIVE
EXAMPLE 2
EXAMPLE 1

Manager eligible for 10% bonus.

Manager eligible for 10% bonus.

Company exceeds targets.

Company meets targets.

Team achieves threshold targets.

Team exceeds targets.

Individual meets targets.

Individual achieves threshold
targets.

Payout =

Payout =

10% x 30% x 200% +

10% x 20% x 50% +

10% x 50% x 100% =

6% + 1% + 5% = 12%

10% x 30% x 100% +

10% x 20% x 200% +

10% x 50% x 50% =

3% + 4% + 2.5% = 9.5%
ESTABLISHING THE FORMULA
 Is it shaping the right behaviours?
 Does it have integrity?
• Are managers effectively distinguishing between
different levels of performance?
• Is there a correlation between cumulative
individual/team and company performance?
• Is there a correlation between individual merit
increases and bonus awards?
 Is it sustainable?
 Has it resulted in an entitlement attitude?
 Is it competitive?