Top 10 Mistakes Made with Incentive Plans – by Susan Malanowski


  1. Too many measures

“Less is more” when determining the criteria or metrics to use in the plan. Plans with 3 to 5 measures can provide balance and focus. Too many measures dilute a participant’s attention and motivation.

  1. Metrics with a weight less than 10% of the total

One of the signs of too many measures is when a measure is weighted to be less than 10% in calculating the incentive. For most participants, a measure that is less than 10% adds very little to individual earnings and so they are easily ignored.

  1. Setting goals that are difficult to evaluate differences in multiple levels of performance

For each measure, goals are set. Goals are most effective when the manager and the employee knows when performance has been achieved, has been under achieved and over achieved and how the payouts align with those levels. Binary or yes/no goals present a significant issue for the incentive plan participant. What happens if there is over achievement or the results were actually close to the achievement or “yes” level but not quite? 

  1. Not tracking the results on an ongoing basis

When designing the plan, one important step is to develop a process for tracking and communicating progress on a regular basis. This is true of company or other types of group goals. Monitoring progress helps maintain focus on the metrics and goals and allows for mid-course corrections or acceleration of the goal. What would happen if no one tracked the score in a basketball game, would the teams know who won the game?

  1. Trying to force the metric’s performance range and payout range to be the same

The most common range of payout opportunity as a percent of the target incentive is 50% at the threshold (or minimum) and 200% at the maximum. The next step is to determine what is the minimum performance required to earn that 50% of target payout or 80% of the goal at target. What is the exceptional level of performance required to earn 200%? Most commonly 120%.  Often there is an assumption that these percentages should be the same, in other words, 80% achievement means 80% of incentive payout. This example may be paying out too much for 80% performance.

  1. Not paying out an annual incentive within 45 days of the end of the performance period

If compensation earned from an annual incentive plan is not paid out within 2.5 months after year-end it is considered deferred compensation and must be structured to be compliant with IRS code section 409A rules. So, it is best to avoid 409A by paying out prior to 45 days following the end of the performance period.

  1. Not being clear about the purpose and/or objectives of the plan

Commonly we see either a purpose being to reward participants for achieving results or to motivate participants to achieve results. Whatever the objectives or purpose, first ensure it is stated and then be as specific as possible tying it back to the results or behaviors you want to the plan to reinforce. Without a purpose or objective, it is hard to evaluate whether the plan is effective.

  1. Focusing on individual measures in the plan when it takes more than one person or function to achieve them

We had a client introduce bonus eligibility for all employees with a significant weight on individual measures or goals. The issue with that for example, many individual employees chose metrics and goals that required significant IT support and IT could not meet the demand. Instead, there needed to be more coordination and communication at the start when finalizing goals and measures.

  1. Not modeling incentive payout scenarios can create multiple negative impacts, such as: participants are paid very little for adding significant value or paid too much for contributing too little

The net payout amounts are not meaningful after standard tax withholding. This usually happens when there are many payout periods, such as quarterly, but targets are small at the lower levels of the organization.

  1. Not aligning the performance measures with the right level of the organization

Utilizing a layer of measures where appropriate that include corporate, regional and/or functional area, and job specific measures and weighting them appropriately can create effective line of sight. At the higher levels of the organization, weighting for corporate metrics is more and at the lower levels, weighting for job specific measures is appropriate. Better yet, ensuring that metrics below the corporate area are cascaded to connect. These multiple layers of goals help employees understand that when the company has a strong year, strong performance of individual goals maximizes payouts. When the company has a poor year, payouts are only driven by strong individual performance and significantly moderated.