2016 Annual Incentive Plan Report

Annual incentive plans play a key role in motivating and focusing employees on a company’s short-term goals. Key considerations for designing an annual incentive plan are selecting the appropriate performance measures and deciding how they should be weighted. Effective annual incentive measures will provide a clear line-of-sight to the overall strategy of the company and/or a participant’s impact on performance. Although there are many ways to structure annual incentive plans, some common themes in annual incentive design among the Top 250 companies are observed:

• Eighty-three percent of companies in the Top 250 use at least one specific financial measure to determine annual incentive payouts, of which 75% use two or more financial measures.
• Non-financial measures (e.g. strategic and individual performance) are also common and are used as a stand-alone measure by 52% of companies with non-discretionary plans.
• Profitability measures are not only the most prevalent annual incentive measures (utilized by 92% of companies with non-discretionary plans), but profitability measures also carry the heaviest weighting among the companies that use them (on average, comprise 59% of the weighting of annual incentive plans among those that use them).
• Among companies with heads of business units reported in their proxy statements, the dominant practice is to emphasize corporate over business unit results for these officers.
• Sixty-two percent of companies in the Top 250 provide a maximum annual incentive payout opportunity of 200% of target, with the remainder divided approximately equally above and below 200%.