Aligning Incentives to Strategy

Background

Our client was going through a multi-year transition to realign the business going forward and to put the organization on a more stable financial footing.  Over the years, the incentive plans (both short- and long-term) were tweaked with various measures added over time.  As the organization brought onboard a new management team, many questions were raised as to whether the incentive plan aligns with the go-forward strategy and will provide an appropriate risk/reward framework to incent success.

Challenges

The incentive plan was complex with numerous performance measures in the short-term incentive plan (measured at different levels) resulting in payouts that trended towards target given the company would outperform on some and underperform on others.  In addition, the performance ranges were not calibrated to reflect the potential range of outcomes creating odd performance outcomes that did not align with where value was being created.  The long-term incentives had significant weighting on short-term and relative performance which made it hard for management to be recognized for absolute value creation.

Results

As a result of the detailed analytic review of past performance outcomes and market practice, we were able to work with the senior management team and human resources committee to identify the challenges in the current design.  We were then able to work through a process of design alternatives in a series of working sessions to refine the programs and create a more focused short-term incentive, a clearer long-term incentive with a better way to calibrate relative TSR performance and the reintroduction of stock options to provide greater alignment to absolute share price growth.