In the past, many employers have used a discretionary bonus system. However, the use of pay-for-performance compensation plans has become increasingly popular.
The process is changing because boards of directors are getting more involved in setting corporate goals and want a mechanism by which those goals can be reinforced. The boards want to guide executive behavior. In that process, companies are tying the payment of bonuses to the achievement of distinct goals.
What defines a pay-for-performance compensation plan?
A pay-for-performance compensation plan is a system by which annual and long-term bonuses are directly tied to the satisfaction of goals. If the executive does not satisfy the goals, then no bonus is awarded.
Pay-for-performance plans typically contain between three and five key milestones or tasks to be attained or completed throughout the year. These goals are typically measurable, quantifiable, and quite black and white so executives can see whether or not they met the goal and will receive the payment.
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