Management consultant FMI draws best practices for incentive plans

Source: FMI, Raleigh, N.C.

An FMI survey of 224 construction industry executives reveals widespread adoption of incentive compensation (88 percent of respondents), but limited (21 percent) acknowledgement that plans are working “very effectively.” The management consultant and investment banking firm’s newest report details survey results and examines best practices for critical incentive plan issues:

  • Discretionary vs. Structured. Companies find a structured plan is fairer to participants and easier to administer if incentives are awarded on results that are readily tracked and available to employees.
  • Arbitrary Pay vs. Market Value. Use of market data ensures incentives are competitive and meaningful for participants, and enables a company to budget the potential payout.
  • Balanced Design Based on What Is Strategically Important. Incentive allocation should be tied to overall company success and an individual’s achievement of predetermined goals.
  • Top-down vs. Bottom-up Funding. Companies using a bottom-up approach establish a fail-safe mechanism to ensure that owners receive a certain return on equity before incentives begin to pay out.
  • Employee Empowerment. Providing an incentive opportunity helps employees focus on what is important and support their commitment to company success.
  • Communication and Transparency. A quarterly progress update, along with informal individual performance feedback, minimizes potential surprises and helps management develop direct reports.
  • Clear and Measurable Stretch Goals/Objectives. Stretch goals exceed those of best past performance; attainment denotes 100 percent target incentive payout.