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Compensation 101

Consulting Inc. Compensation 101. Creating & Administering your Variable pay strategy. Our Agenda. Identifying your variable pay goals Establishing eligibility Determining your cash compensation mix Identifying variable pay triggers Establishing variable pay formula Evaluating the program.

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Compensation 101

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  1. Consulting Inc. Compensation 101 Creating & Administering your Variable pay strategy

  2. Our Agenda • Identifying your variable pay goals • Establishing eligibility • Determining your cash compensation mix • Identifying variable pay triggers • Establishing variable pay formula • Evaluating the program

  3. Variable Pay goals OBJECTIVE: To increase company performance by focusing and shaping employee behaviour GOALS: • Ensure performance targets reflect the behaviour and results that matter most • Ensure rewards adequately reflect different levels of contribution and performance • Ensure individual rewards align with corporate performance

  4. Determining compensation mix

  5. Identifying variable pay triggers • Company financial performance • Net income • Profitability • Other company metrics • Competitive ranking • Customer growth targets • Safety • Team performance • Individual performance • Results achievement • Alignment with company values

  6. Establishing the formula • Modifiers • Thresholds • Performance Multipliers

  7. 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.

  8. Establishing the formula INTEGRATIVE: Financial Target Payout

  9. Establishing the formula INTEGRATIVE : Multipliers 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?)

  10. Establishing the formula INTEGRATIVE : Multipliers Individual and team performance combine together to establish payout.

  11. Establishing the formula INTEGRATIVE EXAMPLE 1 • Employee eligible for 10% bonus. • Company achieves 110% financial target • Team achieves threshold targets. • Individual meets targets. • Payout = 10% x (120% x 75%) = 9% payout EXAMPLE 2 • Employee eligible for 10% bonus. • Company achieves 100% financial targets • Team exceeds meets targets. • Individual exceeds targets. • Payout = 10% x (100% x 200%) = 20% payout

  12. 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.

  13. Establishing the formula ADDITIVE : Bonus Composition Line of Sight helps determine weight

  14. Establishing the formula ADDITIVE : Multipliers are established

  15. Establishing the formula ADDITIVE EXAMPLE 2 • Manager eligible for 10% bonus. • Company meets targets. • Team exceeds targets. • Individual achieves threshold targets. • Payout = • 10% x 30% x 100% + • 10% x 20% x 200% + • 10% x 50% x 50% = • 3% + 4% + 2.5% = 9.5% EXAMPLE 1 • Manager eligible for 10% bonus. • Company exceeds targets. • Team achieves threshold targets. • Individual meets targets. • Payout = • 10% x 30% x 200% + • 10% x 20% x 50% + • 10% x 50% x 100% = • 6% + 1% + 5% = 12%

  16. 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?

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