Annual Incentive Plan Design

The goal of an effective annual compensation program is to align executive pay with concrete measures of company performance.

To achieve this goal, any well-designed incentive plan must be designed using a rigorous process which includes the selection and weighting of performance metrics.

At Longnecker & Associates, our annual incentive plan design services include:

  • Design or recommend the restructuring of annual incentive programs to maximize employee motivation and promote achievement of company goals and objectives.
  • Plan features and recommendations with formula vs. discretionary targets, thresholds, maximums, payout timing, vehicles, plan metrics, etc.
  • Drafting of communication documents.

The Annual Incentive Plan Process

When your company implements an incentive plan design, best practices often include four categories of involved parties:

  • Senior Management (often includes several different people on the design team)
  • The Compensation Committee
  • Audit Committee representative (the “Audit Committee”)
  • Compensation Consultant (the “Consultant”)

As a result, the question which arises most often during the design process is, “Who creates and who critiques?” The following provides a roadmap for navigating the assignment of responsibilities.

Item 1: Incentive Payout Targets, Threshold and Maximum
Create: Consultant – Critique: Management & Compensation Committee

Item 2: Metric Selection
Create: Management – Critique: Compensation Committee, Audit Committee, and Consultant

Item 3: Measuring Performance
Create: Management – Critique: Compensation Committee, Audit Committee, and Consultant

Item 4: Senior Management Payouts
Create: CEO – Critique: Compensation Committee, Audit Committee, and Consultant

Item 5: Chief Executive Officer Payouts
Create: Compensation Committee & Consultant – Critique: Audit Committee & Full Board of Directors

For a more detailed look at our annual incentive plan process, please contact us today.
Measuring the ROI of Incentive Plans

“Incentives with clear goals, metrics, and outcomes create an automatic ROI that is built into the plan.”

-Brent Longnecker

At Longnecker & Associates, we believe that ROI should be the driving factor in annual incentive plan design. The design of any incentive plan should first be based on the level of ROI that the company determines the plan should generate and on how much the company is willing to invest in order to achieve that return on investment.

The plan’s funding should be based on the achievement of quantitative objectives that change as the business grows. It should also be noted that financial ROI is not the only way to measure the value generated by an incentive plan. Tools like employee attitude and customer satisfaction surveys can provide valuable insights into a plan’s return on investment while not clearly translating into direct financial measures of an incentive plan’s success.


Contact us for more information on creating incentive plans.

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