Annual Incentive Pay Plan
Review and Recommendations
Presented to the Board Human Resources Committee
By:
August 21, 2013
Background
Not for profit member organization
Highly technical industry
Results are susceptible to measurement
Requires well educated, talented, technical workforce
Compensation plans need to attract and retain highly
qualified workforce
• No stock available to provide ownership opportunities
•
•
•
•
•
2
Strategic Issues
• The incentive compensation strategy makes sense
– The annual incentive plan enables the Board to provide
meaningful incentive opportunities balanced with
competitive salaries
– Based on review of plans for other ISO’s, the incentives
are being delivered tied to similar balanced scorecards
– Scorecards are commonly used for not-for-profit
organizations because financial metrics are generally not
available to fund the awards
3
Strategic Issues
• Total compensation is competitive to attract and retain
leadership talent
– From our professional experience, planning total cash
compensation (base salary + annual incentive) in the 3rd
quartile of market pay should be sufficient to attract and
retain if there are competitive benefits and an attractive
workforce
– The current cash compensation mix (base salary + annual
incentive pay) provides a good balance that is favorable to
the organization
• If the organization performs well then competitive incentives will
be paid
• If performance is poor then incentives are reduced
4
Strategic Issues
• It appears there is general agreement between the Board and
Management that the plan is effective
– Annual incentives need to be tied to corporate
performance and based on progress toward and
achievement of results
– Metrics being used to measure performance are
appropriate
• Stakeholders have endorsed the performance metrics
• However, we believe the current plan can be improved by
changing the “perspective”
5
Current Annual Incentive Structure
• The three sections of the scorecard are weighted based on relative
importance to the organization
• In order to achieve 150% maximum award, the “math is adjusted”
• Individuals performing at target will actually “score” at 118%
• The plan target is set using stretch goals, and historically, passing all
the pass/fail metrics has never been achieved
Threshold/Fail
Target/Pass
Excellent
Group 1 Core Metrics
(measured/scaled)
32%
64%
96%
Group 2 Core Metrics
(pass/fail)
0%
24%
24%
Strategic Elements
(pass/fail)
0%
30%
30%
Award Earned
32%
118%
150%
6
Annual Incentive Payout History
Year
Annual Incentive Payout
Percent of Target
2012
120%
2011
117%
2010
103%
2009
108%
2008
102%
7
Design Alternative
• Change the perspective on the plan to focus on total bonus
opportunity, which is defined as “Excellent”
– Define total award opportunity as a % of base salary
– The total award opportunity is aligned with P75 of market pay
– Selecting the appropriate market data will be an important
consideration in determining the P75 target
– Achievement of all goals = Excellent and delivers pay at 75th
percentile
– The notion of a “Target” award is eliminated
• Continue to develop threshold, expected and excellent
performance levels for scalable metrics
• Continue to use pass/fail for certain metrics
• The Board will continue to review and approve goals to
ensure there is balance between stretch achievement and
attainable results
8
Proposed Changes to the “Math”
•
•
•
Achievement of Excellent performance in all goals will deliver the total award
opportunity and deliver 75th percentile compensation
If any of the goals are not achieved, the total award delivered will be less than
100% and the total compensation delivered will fall below the 75th percentile
Actual performance will dictate where you fall in the range between Threshold
and Excellent
Threshold/Fail
Below 50th PCTL
Target/Pass
50th PCTL
Excellent
75th PCTL
Group 1 Core Performance
(measured/scaled)
21%
43%
64%
Group 2 Core Performance
(pass/fail)
0%
16%
Strategic Elements
(pass/fail)
0%
20%
Award Earned
21%
79%
9
16%
20%
100%
The “New Perspective” – Pay For Performance
Alignment
Performance
(% Bonus Earned)
Performance
Range
Market Pay
Range
80% to 100%
Excellent
P60 to P75
60% to 80%
Solid Performance
P45 to P60
20% to 60%
Below Expectations
P30 to P45
Less than 20%
Below Acceptable
Levels
Below P30
The market pay ranges are included for illustration purposes and will need
to be tied back to actual market data
10
Senior VP Illustration
Senior VP base salary
Senior VP target %
Current
Structure
$
300,000
45%
Proposed
Structure
$
300,000
67.5%
62.00%
18.00%
20.00%
100.0%
41.33%
12.00%
13.33%
66.7%
Illustrated Performance Achieved:
Group 1 Core Performance
Group 2 Core Performance
Strategic Elements
Performance Achieved
Incentive Calculation:
Senior VP base salary
Senior VP target %
Target Incentive
$
Performance Achieved
Incenitve Earned
Senior VP target %
Performance Achieved
Incentive Earned as % of base salary
$
300,000
45%
135,000
$
100.0%
135,000
45%
100.0%
45.0%
11
$
$
300,000
67.5%
202,500
$
66.7%
135,000
68%
66.7%
45.0%
Annual Incentive Payout History Adjusted For the
“New Perspective”
Year
Current
Method
% of Target
Proposed
Method
% of Target
2012
120%
80%
2011
117%
78%
2010
103%
69%
2009
108%
72%
2008
102%
68%
12
Advantages of Design Changes
• Annual incentive opportunities is aligned with 75th percentile
of market for Excellent performance
• Retain multi-faceted scorecard with balance performance
goals
• Concept of “Target” is eliminated; only if all goals are fully
achieved will the total incentive opportunity be paid
(“Excellent”)
• Actual pay delivered will fall in the range of the bottom
quartile (no bonus earned) to the 75th percentile (100% bonus
earned – Excellent) based on performance achieved
13
Design Alternative – Add Board Discretion
• A fixed % of the award opportunity could be reserved for
Board discretion
– E.g. 10% to 20% of the total award opportunity could be
funded at the discretion of the Board (and not tied to predetermined metrics)
– This allows the Board to consider performance that is not
subjected to metrics at the beginning of the year
14
Board Discretion - Changes to the “Math”
• This schedule reflects the weightings of the performance
goals including 10% Board discretion
Threshold/Fail
Below 50th PCTL
Target/Pass
50th PCTL
Excellent
75th PCTL
Group 1 Core Performance
(measured/scaled)
19%
39%
58%
Group 2 Core Performance
(pass/fail)
0%
14%
14%
Strategic Elements
(pass/fail)
0%
18%
18%
Board Discretion (up to 10%)
10%
10%
10%
Award Earned
29%
81%
100%
15
Questions & Open Discussion
16