Valuing and recognizing the company's top performers are critical factors to staying healthy and competitive in today's marketplace. In addition to other incentives, an annual bonus program provides companies with opportunities to financially reward employees for their contributions each year. However, smaller bonus pools, unfair distributions, misalignment of goals, complex global administration, and other obstacles can plague the integrity of the system, ultimately sending talent out the door. Best Practices, LLC conducted this cross-industry study to investigate how compensation organizations at leading global companies are structuring and implementing pay for performance annual bonus programs to reward top performers and retain talent in today's environment of shrinking resources and increasing talent competition. Savvy companies design, implement, and continuously evaluate a pay for performance compensation plan to reward top performers. By identifying drivers, measures of success, program elements, global differences, and implementation best practices, this study will highlight the must-haves of successful pay for performance bonus plans.

1. Driving Growth & Talent Retention
through Pay for Performance
Best Practices, LLC Strategic Benchmarking Research
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2. Table of Contents
 Executive Summary
 Research Overview
 Participating Companies
 Study Definitions
 Key Findings
 Pay for Performance Program Overview
 Annual Bonus Plan Strategy & Execution
 Annual Bonus Targets
 Implementation Challenges & Pitfalls
 Implementation Successes & Best Practices
 Organizational Complexity
 Participant Demographic Data
 Appendix: Detailed Tables
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3. Research Overview
Best Practices, LLC conducted this cross-industry benchmarking study to identify drivers, measures
of success, common program elements, global differences, and implementation best practices for
successful pay for performance bonus plans.
Study Overview: Topics Examined:
 Research Objective: This cross-industry study  Organizational Complexity
investigates how compensation organizations at  Eligibility Strategy
leading global companies are structuring and  Bonus Plan Metrics
implementing pay for performance annual bonus
programs to reward top performers and retain  Global Uniformity
talent in today's environment of shrinking  Target Bonus Percentages by Job Level
resources and increasing talent competition.  Minimum Bonus Percentage to Motivate
These research findings provide industry metrics  Pay for Performance Drivers and Goals
and insights that can serve as a reference point for  Program Components
compensation leaders in global strategic planning
 Approach for Managers Determining
and implementation initiatives. Bonus Payouts
 Implementation Metrics and Success
 Methodology: Best Practices, LLC engaged 47 Factors
talent and compensation leaders from 17  Communicating Pay for Performance
industries through a benchmarking survey Rollout
instrument to collect quantitative data and  Implementation Challenges and Pitfalls
qualitative insights.
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4. 47 Companies Participated from 17 Different Industries
The 47 compensation leaders in this study represent 17 different industries, with the greatest
number in technology, healthcare and media.
Benchmark Class Companies Include:
IT / Technology 23%
Healthcare / Pharmaceuticals 21%
Media 15%
*Other 13%
Telecommunication 6%
Aerospace / Defense 6%
Finance 6%
Consulting 4%
Hospitality 4%
*Other: (n=47)
Agriculture; Logistics; Manufacturing; Mining;
Oil & Gas; Textile, Apparel, Engineering, FMCG
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5. Key Findings: Program Components & Goals
Analysis revealed the following findings regarding pay for performance program components
and goals.
 Components: Most Pay for Performance Programs Are Multi-Faceted
Companies in both the total benchmark class and the large workforce segment indicate their respective
pay for performance programs include annual salary increases, individual performance ratings and
reviews, short-term and long-term incentives, and non-cash rewards and/or recognition.
 Drivers: Pay for Performance Strategy Aims to Reward & Retain
Rewarding high performers and retaining talent are the most common business reasons or drivers for
employing a pay for performance strategy. Most companies also seek to increase the likelihood of
achieving business objectives, to attract talent, and to increase employee engagement.
 Goals: Most Meet Basic Goals But Few Exceed Them
Most companies in the benchmark class met the key goals of their pay for performance plan, which
include: rewarding high performers, retaining and attracting talent, increasing the likelihood of achieving
business objectives, and decreasing over-payments to low performers. Few exceed these.
 Unmet Goals: Employee Engagement & Entitlement Goals More Difficult for Large Workforces
Within the large workforces segment, more than 40% of respondents were unable to determine if their
pay for performance programs increased employee engagement, and none achieved the goal of
eliminating an entitlement culture.
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6. Multi-Step Process Drives Successful Implementation
Successful implementation of pay for performance is a multi-step process involving demonstrating
need, aligning with corporate goals, deploying appropriate technology, communicating to and
training all employees, and measuring and improving results.
11. Measure & improve 1. Build a business case
10. Educate the 2. Align goals with
workforce in advance of corporate business
launch & beyond objectives
Best-in-Class
9. Inform, involve & train Pay for 3. Establish meaningful
managers minimum bonus level
Performance
8. Develop a
Implementation 4. Create a simple bonus
comprehensive
communication plan
Process plan & standardize
globally
7. Determine how to 5. Secure executive
measure success sponsorship/support
6. Deploy supporting
technology
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7. Most Pay for Performance Programs Are Multi-Faceted
Companies in both the total benchmark class and the large workforce segment indicate their respective
pay for performance programs generally include annual salary increases, individual performance ratings
and reviews, short-term and long-term incentives. At approximately half of companies, non-cash rewards
and/or recognition tactics are also used.
Q. What are the components of your pay for performance program? (Check all that apply.)
Pay for Performance Program Components:
Annual salary increase 97%
95%
Individual performance rating 95%
100%
Individual performance review 92%
90%
Short-term incentives 82%
85%
Long-term incentives 62%
70%
Non-cash rewards and/or recognition 54% All Companies
55% (n=39)
Large Workforce
Other (specify) 10% (n=20)
15% *Other:
• Cash bonus
% Responses • Eligibility for management development programs
NOTE: Blue italic text indicates • Job-based incentives and sales commissions
Large Workforce segment response • Long-term incentives are for Exec only
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8. Align Incentives & Reviews To Further Shape Culture
Savvy incentive leaders noted that pay for performance incentive systems should be aligned with
performance reviews. By doing this, both the incentive and the review communicate the value of
performance and underscore “entitlement thinking” is not the end game. Aligning incentives & reviews
help focus the culture on performance. The “Vitality Curve” force ranking of performance – popularized
by GE & Jack Welch – was cited as a complimentary performance system.
(INCENTIVE + PERFORMANCE REVIEW = PERFORMANCE OUTLOOK)
Grow Retain Prune
Pay For Performance Vitality Curve Performance
Rating & Review: By pruning the
Use incentives to grow and accelerate bottom 10%, PFT incentives are further
top performers. underscored.
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9. Managers Follow Payout Guidelines with Recommendations
To help determine optimal bonus payout amounts, nearly half of respondents indicate that managers
follow payout guidelines and recommendations. One-fifth of respondents in the large workforce segment
require managers to use a carve-out approach where a specified portion of the bonus pool is reserved for
top performers and the remainder is distributed among average to low performers.
Q. Indicate which approach to decision making that managers use to determine bonus amounts. (Choose one.)
Decision Making Approach
Total Benchmark Class: Large Workforce Segment:
No bonus payout No bonus payout
guidelines or guidelines or
requirements
** Hybrid Model
15%
requirements
(managers determine ** Hybrid Model
5% (managers determine
5% 15%
bonus amounts) bonus amounts)
Required to use Follow payout
carve-outs, 13% guidelines that Required to use
include carve-outs, 20%
recommendation
Required to use s for determining
Follow payout
forced bonus amounts
guidelines that
distribution 49%
include
approach Required to use recommendations
13% *Other (specify): forced distribution for determining
5% approach bonus amounts
15% 45%
(n=40) (n=20)
Carve-outs: % of bonus pool reserved for top performers, remainder distributed to average and/or low performers.
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10. Target Bonus Percentages for Executives Vary
The average target bonus percentage for executives varies among benchmarked companies. Nearly
70% of respondents in the total benchmark class, compared to 61% in the large workforce segment,
set annual bonus targets for executives at 31% or more. Overall, annual bonus targets for directors
fall between 11% and 30% at most benchmarked companies.
Q. What is the average target bonus percentage for employees at the following job levels?
Executives:
All Companies (n=35)
Large Workforce (n=18)
% Responses
28% 26% 28%
22% 23% 20%
17%
9% 11% 11%
3% 3%
Bonus
Amount: 0% 1-5% 6-10% 11-20% 21-30% 31-40% 41-50% 50%+
Directors: All Companies (n=36)
Large Workforce (n=19)
% Responses
32% 33%32%
28%
17%16%
6% 5% 8% 11% 6% 5%
3%
Bonus
Amount: 0% 1-5% 6-10% 11-20% 21-30% 31-40% 41-50% 50%+
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11. Multi-channel Training & Communications Are Deployment
Requirements
No single communications channel is enough to effectively deploy pay for performance systems.
Consequently, veteran pay for performance program leaders advocate multi-channel communications
that consistent of training – for both managers and employees – and ongoing meeting and
communications. Each year these communications cascaded are refined, updated and repeated.
Multi-channel Communication
• Face-to-face meetings
Mandatory
Training
• Intranet postings
• Information packets
• Online modules
Live Meeting • Webinars
• Road shows
• Bonus calculator tools
Online
Training • Emails
• Brown-bag lunch sessions
Continuous • Top-down executive messaging
Online
Communica- • Classroom training
tions
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12. Exec Support & Communications Are Key to Rollout Success
Critical success factors in rolling out a new pay for performance program are executive sponsorship
and a sound communication plan. A majority also rated plan features and manager training as “highly
important” for successful program implementation. Participants tended to favor rolling out the entire
program at once as opposed to implementing the program in phases.
Q. In rolling out the pay for performance plan, how important were each of the following activities in assuring program
success? (Choose one importance rating for each activity.)
Success Factors (Total Benchmark Class)
Not Used Not Important Somewhat Important n=
Highly Important
Executive sponsorship 5% 9%
3% 83% 35
Communication plan 11% 19% 70% 36
Features of the plan 2% 42% 56% 36
Manager training 14%6% 29% 51% 35
Employee/ stakeholder education 16% 6% 31% 47% 36
Change management strategy 23% 8% 23% 46% 35
Creating a business case 15% 6% 44% 35% 34
Rolling out the entire program at once 17% 17% 33% 33% 35
Rolling out the program gradually/ in phases 44% 21% 29% 6% 34
% Responses
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13. About Best Practices, LLC
Best Practices, LLC is a research and consulting firm that conducts work
based on the simple yet profound principle that organizations can chart a
course to superior economic performance by studying the best business
practices, operating tactics and winning strategies of world-class
companies.
Best Practices, LLC
6350 Quadrangle Drive, Suite 200, Chapel Hill, NC 27517
919-403-0251
best@best-in-class.com
www.best-in-class.com
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