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Target Bonus Percentage for Executives
 

   5/1/2008

Target bonus percentage for executives is a form of incentive compensation that refers to the amount of compensation above base salary that an organization plans to pay employees who are in executive positions. This incentive compensation specifically refers to cash compensation and does not include stock options, restricted stock or other non-cash incentives. An executive-level position in an organization includes the president, CEO and almost always the next level of management that reports to the president or CEO—positions such as vice president, chief or business unit head. However, caution is advised when identifying executives solely based on title. For example, a director in a manufacturing organization may be an executive-level employee whereas a director in a financial institution may not. Target bonuses are not included in executive’s base salary but are calculated as a percentage of base pay. The way organizations calculate this metric is as follows:

Target bonus percentage for executives    =                                

Total projected bonus amount in cash for all executives during a fiscal year

Total amount in dollars of base salaries for all executives during a fiscal year.

Because most executives possess a large span of control over company resources compared with nonexecutives, they can also have significant influence over organization-wide results. For example, an executive running a $50-million business unit employing 200 employees possesses more control to lead sales, manage development efforts and make trade-off decisions to achieve revenue targets than an employee who is an individual contributor. Because executives can dramatically influence organizational success or failure, most organizations provide significant cash bonuses to incentivize executive behavior. The median target bonus percentage in cash for executives was 20%, significantly higher than a median of 9% for nonexecutives,1 Target bonuses can be a recruitment and retention tool, and HR executives should know what competitors in their industry are offering in order to keep executive talent. The range for target bonuses for executive employees varies greatly. For example, the pharmaceutical industry offers the highest amount with a median target bonus percentage of 27%, whereas government organizations offered the lowest at 5%.2

HR professionals may find it helpful to use hard data about compensation practices from competitor organizations to justify changes in their organization’s compensation programs. For additional benchmarking data and to learn how the SHRM Customized Benchmarking Service can take your HR department to the next level, please visit our website at www. shrm.org/research/benchmarks or call 1-800-283-7476 ext. 6366.

Endnotes

[1] SHRM Human Capital Benchmarking Service Database [unpublished data].

2 Ibid.

Project Team

Project Leader: John Dooney, manager, Strategic Research

Project Contributor: Steve Williams, Ph.D., SPHR, director, Research

Editor: Nicole Gray, copy editor

Disclaimer

This article is published by the Society for Human Resource Management (SHRM). All content is for informational purposes only and is not to be construed as a guaranteed outcome. The Society for Human Resource Management cannot accept responsibility for any errors or omissions or any liability resulting from the use or misuse of any such information.

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