Incentive Pay Eligibility Varies by Job and Location

The economic downturn has accentuated the need to contain compensation costs by holding down fixed, base salary expenses. To maintain competitive pay plans, an increasing number of companies are giving more employees across different jobs the opportunity to earn variable, performance-driven incentives for achieving individual and organizational goals.

This article, based on participant data from Culpepper Compensation Surveys, provides a high-level analysis of short- and long-term incentive eligibility for operations, technical, and life science employees in the United States and Canada.

Within each job group, we provide aggregate breakouts for the following combination of non-executive job levels:

• Director levels (director and senior director levels)
• Manager levels(manager and senior manager levels) 
• Advisory levels(advisory and senior advisory levels)
• Individual contributor levels(associate/entry, intermediate, and senior levels)

Impact of Job Level on Incentive Eligibility

There is a strong relationship between job level and eligibility for earning incentives. Moving from individual contributor up to director levels, the opportunity to earn incentives typically increases. However, this pattern is not consistent.

It is not uncommon for advisory-level employees to be more likely to earn incentives than higher-level manager positions. Advisory-level employees typically have over 10 years of experience and are considered skilled experts in their field. In critical job functions, companies will often pay advisory-level employees at market rates close to or above manager-level positions.

Eligibility for Short-Term Incentives

Short-term cash incentives include bonuses, commissions, cash profit sharing, and other forms of variable cash payments typically earned within a year. Director-level employees are about two to three times more likely than individual contributors to be eligible for short-term incentives (Table 1).

Incentive eligibility also varies by type of job and location. In the United States, life science employees are more likely to have the opportunity to earn short-term incentives than operations and technical employees. In Canada, technology employees are more likely to have the opportunity to earn short-term incentives than operations and life science employees.

Eligibility for Long-Term Incentives

Long-term incentives include stock options, restricted stock shares/units, performance stock shares/units, phantom stock shares, stock appreciation rights and other incentives typically earned over more than one year.

Overall, significantly fewer employees are eligible for long-term incentives than short-term incentives. Broad-based long-term incentive programs have fallen out of favor in recent years. Expensing requirements, declines in stock prices and volatility in the stock market have led many companies to limit long-term incentives to executives and director level employees. In lieu of awarding long-term incentives to non-management employees, many companies have reported shifting toward greater use of performance-based short-term cash incentives.

Director level employees are two to six times more likely to be eligible for long-term incentives than individual contributors (Table 2).

In the United States, director level life science employees are more likely to be eligible for short-term incentives than operations and technical employees. However, at lower job levels, technical and operations employees are more likely than life science employees to have the opportunity to be awarded long-term incentives.

In Canada, director level technical and operations employees are more likely to be eligible for short-term incentives than life science employees. At lower job levels, technical employees are more likely than operations and life science employees to have the opportunity to be awarded long-term incentives.

Correlation Between STI and LTI Eligibility

There is strong correlation between short- and long-term incentive eligibility. Employees eligible for long-term incentives are much more likely to be eligible for short-term incentives than employees not eligible for short-term incentives. With the exception of pre-revenue start-ups and companies with limited access to capital, most companies that award long-term incentives to employees also provide opportunities to earn short-term incentives.

Differences Between Job Specialties

Incentive eligibility can vary significantly between specific types of jobs in similar departments or job functions. For example, within accounting and finance, Sarbanes-Oxley auditors are more likely to receive incentives than general accountants. In information systems, Oracle database administrators are more likely to be eligible for incentives than other types of database administrators.

Differences Between Countries

The data in this article is limited to the United States and Canada. However, in other countries, significant differences emerge in short- and long-term incentive eligibility. Multinational corporations should consider carefully a variety of factors when designing compensation plans, including the use of cash allowances, impact of tax code on pay and cultural differences between countries. Differences between countries and job specialties underline the importance of using job-specific data when determining incentive eligibility.

Data Source: Culpepper Compensation Survey, May 2009

Leigh Culpepper is president and CEO of Culpepper and Associates Inc., which conducts worldwide salary surveys and provides benchmark data for compensation and employee benefit programs.

Reposted with permission

Article Source: Culpepper eBulletin, May 2009

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