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Tips on Measuring Compensation Plan Effectiveness

Most organizations today have at least one – but typically multiple incentive and/or bonus plans. After implementation, there is a tendency to put these plans on auto-pilot. But, “Measuring Plan Effectiveness” should be an annual part of your year-end compensation process in preparation for the following Plan year.


The data collection and review should include all key stakeholders. Since I like steps, let’s look at some key stakeholders that should be included in measuring the effectiveness of your plan:


1. Plan Participants – It is important to obtain information from the Plan participants on how they view the Plan. Find out the motivational and directional aspects of the Plan. Ask what has worked well and what has not worked. Pay particular attention to comments regarding communication.

2. Leadership Team – The most effective incentive plans communicate the business strategy, performance goals and objectives of the organization, as well as reflect its culture and values. Find out the degree to which leadership perceive the plan as having helped the group meet the desired end results.

3. Owner of Results – Obtain information regarding the results of each component of the Plan. You will need to determine if there is a relationship between the comments of the participants and Leadership team. Are the Plan components working the way it was designed or the way it was intended?

4. Plan Administration and Payout – Analyze data obtained from payout at each participant level. This data will help identify gaps in data collection, including performance or other anomalies, such as the plan paid out at a very high level, yet the financial or qualitative performance reflects performance at a much lower level.

5. Chief Financial Stakeholder – This is a very important meeting. The Chief Financial stakeholder is uniquely able to validate the strategic direction of the organization and alignment with the Plan.


After your interviews with the key stakeholders and the collection of appropriate data, test several scenarios. Include a cost analysis to ensure the Plan makes sense. Measure the cost vs benefits.


Now you’re ready to write a report of the results of your review. This report formulates the foundation and justification for any Plan changes. This information should be shared with everyone important for the acceptance and approval of the Plan.


Oh, don’t forget bonus and incentive plans should be re-communicated, including any Plan revisions, at the beginning of the new Plan year—no later than January 15. Communicate results early and often to incent participants all year, not just the first three (3) months or the last three (3) months. Wait, one last thing, don’t forget performance goals should be finalized in January, as well. Yes, I know…

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