The following is an excerpt from a conversation that took place at MLR Media's Character of the Corporation conference.

Matt Vnuk: What should be incorporated into an executive bonus program?  

Dawn Zier: Executive bonus programs have to be built in a way that is easy for teams to understand how they’re being measured and rewarded. Building the plan around the annual financial goals should be expected, but the plan shouldn’t be just about hitting financial targets — how you achieve the numbers is also important. I believe in addition to the pure financial goals, it is critical for the annual plan to have one or two strategic goals that reward for planting future seeds of growth. A third element that I like to see built into the plan is a culture component, especially if you are trying to drive transformation and change. The reason companies most often fail to execute often comes down to culture and lack of focus. 

For plan construction and weighting, I recommend that revenue and EBIDTA achievement, or whatever the two most important financial metrics are, comprise 70%-75% of the plan. A self-funding element like EBITDA is an important part of the construct to be able to reward for overachievement. The remaining 25%-30% should be tied to strategic or culture goals. Avoid creating a long laundry list because each element has to be impactful and drive a unified focus throughout the organization. 

Vnuk: In terms of driving desired behavior, part of doing so is understanding the bonus program, understanding the metrics, and understanding the what and the why. How often should the metrics be reviewed, and what frequency of change is too much?

Beth Albright: I’m going to bifurcate my answer into reviewing the attainment of the metric versus the metric itself, because I think they are different. In regard to the attainment, your HR and finance group should probably present that to the board at least every six months. Management can look at it more often if they like. But the board can at least say, “Are we on track? Is this working? Also, do we still believe that this metric is driving the right behavior for the strategy?” Everything has to go back to your strategy. If you’re going to reward people, you want to make sure that their activities are helping you achieve your strategy. I think the metric itself should be reviewed at least annually. That doesn’t mean that you should change it annually, because you want to drive long-term success for the organization. Depending on your organization, the cycle might be more than one year. But I think you have to ask the question every year, “Is this metric still relevant to the strategy that we’re trying to attain, and is it driving the right behavior?” 

When you think about an annual bonus, studies have shown that performance-based metrics are viewed more positively by your peers and workforce than profit-based metrics. I think it’s really in how you present it to the employees, because when you say, “I will reward you for your performance,” it’s personal to them, versus “I will reward you for making profits for the organization,” which is outside of them. The communication should say, “Here are our metrics and here’s why they are our metrics. Here’s how they connect to our strategy. Here’s what’s in it for you. And we’re going to look at it at least every year.” I wouldn’t recommend that you change your metrics that often, because it is a heavy lift for communication. One thing that I’ve learned is that people, including some executives, don’t always understand the compensation packages. So there’s a communication element, because people should know how they can be rewarded.