In­cen­ti­ve sys­tems

In light of the global financial and economic crisis, the issue of executive pay has become even more controversial. Current reasons why companies restructure their incentive systems include:

• Anchoring new management concepts all the way down to the level of individual responsibility
• Harmonising divergent incentive systems across regional or merged business units
• Recognising that the desired incentive effects are not being achieved because of long-running “bonus inflation” and marginal performance differences

The challenges are often similar. Many bonus systems add a variable component to remuneration, but only have limited behavioural effects. Managers lack a direct relationship with their own business, and often they do not feel able to influence the assessment basis much. All too often, the disjunction between annual incentive systems and divergent business and investment cycles offers tempting opportunities to achieve short-sighted successes.

The key questions regarding the (re-)design of incentive systems have to addressed at the interface between corporate management and human resource management:

• Assessment bases: which company indicators enable remuneration to be made variable in alignment with management practice while also setting the right incentives for employees?
• Targets and governance: does corporate planning provide a basis for ambitious targets suitable for the incentive system? If not, who determines the targets?
• Business model: is the proposed performance period aligned with the time horizon and cycles of the operational business? How can distortions and manipulations be prevented?
• Cascading logic: how can entrepreneurial responsibility for the business as a whole be promoted at lower management levels, how can the risk of territoriality be reduced?
• Target groups: which management and staff groups should participate to which extent, and how can service and HQ functions be involved?
• Bonus model: which mechanisms can be used to achieve greater differentiation by performance in the context of target evaluations and bonus calculations, in other words: how can the risk of target/bonus inflation be avoided?

Incentive systems provide an ideal attachment point for anchoring the strategy and corporate management practice in the minds of executives and employees.

CTcon will support you in the customised restructuring of your incentive systems, linking them to your business model, management practice and organisational culture, all the way from the concept to the roll-out and through to anchoring in controlling and HR control processes.