Maximize the Effectiveness of Short-Term Incentive Plans

Focus on leveraging a STIP to drive behavior and results, rather than just a necessary cost to running the organization.

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Contributors

Cal Barber, Independent Compensation Consultant, Professor & Consultant, Seneca College of Applied Arts and Technology
Chuck Csizmar, Principal, CMC Consulting Group
Cindy Xing, Independent Compensation Professional
Jeffery O’Leary, Manager – Performance & Planning, Maple Leaf Foods
Jerry McAdams, Author
John Brockman, Director Compensation, SuperValu
John Rubino, President, Rubino Consulting Services
Kieran O’Reilly, Managing Partner, Flintlock Consulting
Scott Busch, Vice President Total Rewards, Samuel, Son & Co.
Steven Osiel, Vice President Compensation & Incentives, Accompass, Lecturer at the University of Toronto
Trista Brudnick, Executive and Relocation Services, Reward Service Delivery, John Hancock/Manulife

Your Challenge

Employees struggle to identify the link between their actions and the short-term incentive plan (STIP), resulting in payouts that do little to focus employee behavior or drive a pay-for-performance culture.
A STIP is a key part of the Total Rewards offering and is critical to compete for talent in today’s tough labor market.
Many STIPs incorporate too many performance measures, overcomplicating the plan and making it nearly impossible for employees to understand.

Our Advice

Critical Insight

Your STIP can’t be everything to everyone – align the plan with key organizational objectives to highlight behaviors for success.
Leverage modeling to identify and mitigate risk inherent in performance measures to avoid unforeseen consequences of a STIP.
Balance administration with customization. While it is important to divide your employee population into logical segments to design relevant STIPs, creating multiple STIPs can be unwieldy to administer.
Translate “compensation speak” into clear everyday language so that all participants comprehend the STIP. For a STIP to direct employee behavior in the manner intended, managers and employees need to understand it.

Impact and Result

Use McLean & Company’s four-step process to design a customized STIP that focuses on the achievement of organizational objectives, while also incorporating line of sight for employees.
Keep it simple – this will ease the administration, comprehension, and communication of the STIP.
Monitoring, adjusting, and reviewing regularly are critical for the ongoing success of a STIP.

1. Align the STIP with key strategic priorities

Identify organizational priorities to ensure the STIP drives key objectives.

Maximize the Effectiveness of Short-Term Incentive Plans Storyboard

Maximize the Effectiveness of Short-Term Incentive Plans Executive Briefing

STIP Design Tool

2. Design the STIP

Create the STIP structure, select performance measures, define targets, delineate weightings, and identify a modifier.

3. Plan the STIP payout

Model multiple STIP scenarios, identify risks, and define logistic requirements.

4. Communicate, monitor, and review

Train managers to communicate the STIP and continually evaluate.

Short-Term Incentive Plan Overview Template

Training Deck: Equip Managers to Have Effective Pay Conversations

Guided Implementations

This guided implementation is a sixteen call advisory process.

Guided Implementation #1 - Align the STIP with key strategic priorities

Call #1 - Assess current state and discuss current STIP pain points.

Call #2 - Select key organizational objectives.

Guided Implementation #2 - Design the STIP

Call #1 - Discuss STIP structure and participation.

Call #2 - Review how to select organizational, business unit, and individual performance measures.

Call #3 - Brainstorm potential risks associated with each performance measure.

Call #4 - Discuss sources of data, data required, and triangulation.

Call #5 - Review how to select performance measure thresholds, targets, and maximums.

Call #6 - Examine performance measure weightings.

Call #7 - Discuss sources to determine the target payout percentage.

Call #8 - Review modifier and implications.

Guided Implementation #3 - Plan the STIP payout

Call #1 - Discuss key modeling practices and how to evaluate and mitigate the associated risks.

Call #2 - Prepare to share modeled scenarios with executives.

Call #3 - Develop a list of logistic action items.

Guided Implementation #4 - Communicate, monitor, and review

Call #1 - Customize the STIP Overview Template to your organization.

Call #2 - Discuss and plan for manager training and education.

Call #3 - Review STIP implementation and discuss areas for improvement.

Short-Term Incentive Plans

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Course Information

Title: Short-Term Incentive Plans
Number of Course Modules: 5
Estimated Completion Time: 1.5 hours

Learning Outcome

Describe at a high level how to design a short-term incentive plan and how to overcome/mitigate any challenges and risks.

Learning Objectives

By the end of this course, learners will be able to:

Explain the challenges facing short-term incentive plans and the importance of aligning a plan with key strategic objectives.
Recall the design elements of a short-term incentive plan.
Discuss the various risks inherent in short-term incentive plans and how to mitigate them.