Did you know these three trends in incentive pay design?

Incentives

Posted by Gregory Stoskopf, Sheila C. Sever, and Michelle Nguyen on May 8, 2014

Thanks to a new and unique study by WorldatWork in conjunction with Deloitte Consulting LLP and Vivient Consulting, we have a much more comprehensive picture of how organizations use incentive pay than ever before. The research examines the incentive pay practices of three distinct employer groups: publicly traded companies, privately held companies, and non-profit/government organizations. Being able to easily compare data across these groups has brought some intriguing findings to light. Here are three trends from the survey findings.

  • Restricted Shares have clearly outpaced Stock Options as the most common equity vehicle for public companies. Use of restricted shares of full-value stock is more prevalent than stock options among respondents in publicly traded companies, with 88% offering restricted stock vs. 64% offering stock options. It’s been nearly 10 years since stock options were required to be treated as an expense, and we’re definitely seeing the use of restricted stock continue to outpace stock options. This finding aligns with recent Deloitte Consulting LLP research conducted in conjunction with the National Association of Stock Plan Professionals on domestic stock plan design (see Five trends in stock compensation.).
    In contrast, private companies have not followed suit: While long-term cash plans are the most common long-term incentive (51%) among survey participants, the use of stock options (23%) and restricted stock (22%) are about even. Only 16% of non-profit/government organizations report having a long-term incentive plan.
  • About half of public organizations surveyed include nonexempt employees in their annual incentive plans (AIPs). A surprisingly high percentage of nonexempt salaried employees (55%) and nonexempt hourly employees (53%) are eligible for annual incentive or bonus plans at public companies. Such high percentages would have been unheard of 10 or 15 years ago and may indicate that organizations are looking at all employee levels when developing incentive pay practices. Almost all organizations offer AIPs to their executives/officers and exempt salaried employees (96% and 97%, respectively).
    The public company results were about 10% higher compared to private companies (42% for nonexempt salaried employees, 45% for nonexempt hourly employees) and 20% higher compared to non-profit/government organizations (33% for nonexempt salaried employees, 35% for nonexempt hourly employees).
  • Most organizations are using fewer than five different short-term incentive plans, although the number can vary. About 66% of public organizations surveyed have fewer than five different short-term incentive (STI) plans in place. On the other side of the spectrum, 14% of organizations are using more than 26 plans. The difference between these extremes could indicate a trend toward simplified incentive plan administration and program consistency across employee groups. At the same time, some organizations will want to address variation by business unit or employee group within the organization (such as sales, executives, hot jobs, etc.). While we may see consolidation in the use of STI plans, there is no magic number – this will vary and depend on the relative size of the organization and diversity of its business structure.
    Private companies report a dramatic increase in the number of different STI plans in place. In 2013, 39% of respondents reported that their companies have four or more STI plans in place, while this figure was 23% in 2011. For non-profit/government organizations that were surveyed, 68% offer between one and three plans, while 32% offer four or more.

By surveying these employer groups separately and in detail, it’s our hope that “knowledge is power” and that organizations can use the data to enhance their current incentive pay practices based on a broader understanding of how incentive pay is being used across the board. For example, how do your organization’s practices compare to others in your general category? What practices of organizations outside your category offer food for thought, particularly given the competitive talent environment and the importance of incentive pay in attracting, rewarding, and retaining talent? Are there opportunities to incorporate other types of incentives you’re not currently using (spot awards, retention bonuses, gain-sharing plans), or to widen the pool of those eligible for incentives?

We’ll be featuring more of the surveys’ findings at Evolve, WorldatWork’s Total Rewards 2014 Conference & Exhibition in Dallas, May 19–21, 2014. On Tuesday, May 20, Deloitte Consulting LLP and Vivient Consulting will facilitate a panel discussion titled Incentive Pay Face-Off: Are Public or Private Companies Winning the War for Top Talent. The session will present survey results, including the prevalence of different incentive plan vehicles and design features at public and private companies, and offer insight to help you evaluate your own variable pay program. We hope to see you there.


Gregory Stoskopf is a Director in the Human Capital/Talent Performance and Rewards practice of Deloitte Consulting LLP, with a focus on broad-based compensation, performance management and talent management consulting. He is a frequent speaker and author on compensation and talent topics within the HR profession.
Sheila C. Sever, CCP, is a manager in Deloitte Consulting LLP’s Compensation Strategies practice with more than 20 years of consulting and corporate experience. Sheila has authored articles published in WorldatWork’s workspan magazine and WorldatWork Journal, is a recipient of WorldatWork’s Lifetime Achievement Award, and frequently speaks locally and nationally on compensation and human capital topics.
Michelle Nguyen is a consultant in the Compensation Strategies practice of Deloitte Consulting LLP. Based out of Houston, Texas, she has experience with Short Term Incentive plan design and evaluation, as well as compensation solutions.

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