Target goals used in objective-based plans can be anything important to thebusiness. Standards for the goals usually are formulated based on the businessplanning process. A manufacturing group might choose goals and standardsrelated to costs, safety, production, and environment. A service enterprisemight choose productivity, accuracy, customer service, or cash flow.
As part of the crafting of a unit-based plan, a schedule of payoutspredetermines how much additional cash for each incremental improvement inperformance will accrue to the incentive fund. Management plans typically beginto fund at a minimum level of performance, depending on what is needed tomaintain competitive pay levels relative to similar positions in the market.What constitutes the minimum level of performance, or threshold, is amanagement decision influenced by competitive strategy and managementphilosophy.
Performance on each of the criteria relative to the business plan generallyproduces a rating by assigning "points" or some other mechanism in amanagement employee unit-based plan. The rating is used to "size" thefund pool. For example, "on target" performance produces 100 points,and would generate 100 percent of the budgeted incentive pool. A rating of 80points would generate 80 percent of the budgeted incentive fund.
Once the fund pool size is determined through the rating of the business,the fund is distributed to individuals, based on their performance againstpre-planned objectives. Planned achievements are specific, quantifiable endresults that evolve from the position's accountabilities. Usually, they centeron the five most important expectations that a manager has for the year.Examples of these individually planned objectives might include:
The idea is that if all the planned achievements were put together, theywould reflect the business unit's overall goals.
Senior management can rate management employees against their plannedobjectives on a scale of 50-150 or 0-200 to achieve a wider performancedistribution. If target performance equals 100 points, the sum of the pointsassigned to all individuals combined should equal 100 times the number ofindividuals, in order to fully spend the fund.
Top-down management incentive plans are easier to implement in profitcenters, or revenue-producing areas. Staff-support areas are more difficult torate because of the unquantifiable nature of results. The rating processgenerally looks to the business strategy as the measure of performance.However, as total quality management (TQM) becomes prevalent in U.S. business,more and more plans are involving the customer in the rating process.
And companies are looking to "beef up" their management incentiveplans by competitively benchmarking their performance, bottom-line, againsttheir business competitors. Ultimately, this is the best way to ensure thatmanagement awards truly reflect performance.