Incentive Plans in a Turnaround: Little Hits May Lead to Big Wins

When performance stalls, the temptation is to structure incentives to reward aggressive growth and shareholder returns – but this doesn’t always work, according to a new Semler Brossy piece.

The big picture. When times get tough, executives become laser-focused on the critical tactics that will be most effective in getting the “win,” and the incentive plans need to support these efforts. While everyone loves the excitement of a home run, setting aggressive goals comes with the higher risk of a swing and a miss. A different approach that rewards steady, incremental performance improvements by hitting “singles” may be the better play.

1.  Which approach is better?

Semler provides a matrix for assessing whether “singles” or “home run” is a better approach, taking into account factors such as the addressable market, how resilient the business is to external shocks, how much investment is possible “ahead of the curve,” etc.

2.  Design an incentive plan aligned with the chosen approach.

A “singles” strategy may lean more on predictable outcomes and steady payouts while “home run” may indicate outsized long-term payouts with careful calibration of goals. Semler gives examples:

• Risk profile and leverage. A home run method gives a high upside for ambitious goals, while a “singles” approach sets achievable goals and steady pay delivery.
  
  
• Time horizon. A home run approach will support near-term results while driving to a longer-term win while a “singles” approach drives near-tern wins that build to long-term success.
  
  
• Pay mix. A “singles” approach will rely more on base or bonus (cash-focused).
  
  
• Metrics. A home run approach will focus on financial and value-based metrics to create shareholder alignment. A “singles” approach will concentrate on clearly defined financial, operational and strategic measures.
  
  
• Goal setting. A home run approach will require calibration to enable a big upside whereas a “singles” approach will include must hit targets with limited upside.

The level of executive buy-in is also a very important limiting factor – if the focus is on perceived risk, a home run approach may be too aggressive to be effective.