With 2020 bringing an upheaval the situation will likely prevail into 2021. The best way to be able to flourish is to start planning. It is essential to adapt to the new normal by reimagining annual and long-term incentive plans for 2021 and beyond.
It has now sunk in that the pandemic and its assorted economic after-effects are likely to be around for a while. The economy going into 2021 will be weaker than it was going into 2020. However, most companies had optimistic projections for 2021 compared to 2019.
Listed below are a few initiatives companies ought to consider:
In 2021, with a higher risk and greater uncertainty, the sensible option is to reduce the risk and leverage enclosed within the incentives. This leads to reduced tumult and lowered incremental payout per unit of incremental performance. This can be accomplished with:
De-risk the incentives
- Expanded performance ranges capable of flattening the payout curve
- Lower maximum and minimum payouts
- Flatter targets by making target performance a range rather than a single number or point on the payout curve
Lower performance goals
Given the current state of the economy, most companies will be prudent in keeping their performance goals for 2021 lower. Redefining or even reducing company goals for 2021 needs to be done by keeping in mind the total cost of the incentive plan against the lower profit or other performance goals.
Small to mid-size companies and marginally profitable companies need to ensure this is done to maintain optimal sharing ratios within a reasonable range. Based on the country and the local regulations evaluating director pay as a portion of profits needs to be done while reviewing the alignment of performance and payouts.
Modify performance measure metrics
In light of uncertain environments with reduced potential for growth, it is essential to place a priority on cash flow or EBITDA with a reduced focus on revenue. This is highly contingent on the opportunities and challenges faced by the company and evaluating how different this is from the company’s pre-COVID business environment.
Reimagine strategic measures
Keeping in mind the current economic ecosystem, taking advantage of market inefficiencies and dislocations might be one of the better options. This is a good time to making key strategic moves such as:
- Exiting businesses
- Repositioning assets
- Accelerating new technologies
- Shuffling costs and investments between businesses
Relative performance measures
Evaluating performance relative to contemporaries is a reliable way to assess performance and eliminate the challenge of setting goals.
However, apart from Total Shareholder Return, navigating relative measures is tricky. Estimating a company’s financial performance is simple. However, drawing direct parallels to other companies, especially those in other countries brings with it its fair share of challenges with definitions, adjustments, inconsistent reporting and timing of data availability.
Based on this, relative performance is optimal when metrics such as revenue growth or unadjusted earnings growth are in place.
Monitor long-term incentives
Relative to the West, Asian companies are more dependent on share options and time-vesting restricted shares. In uncertain economic ecosystems, this practice will certainly prove to be beneficial.
For a while now, Asian firms have been moving to an LTI mix that relies on performance-vesting shares. However, 2021 looks to be optimal for companies to ensure that companies are not heavily dependent on performance-vesting shares.
Annual goals & long-term performance plans
Setting three-year goals will likely be very tough and confusing. It is more prudent now to plan with three one-year goals. A better way to set goals would be to
- Consider average performance over three years instead of setting three-year cumulative goals
- Focus on performance in the third year of the plan
Building your incentive program
The level of uncertainty that 2020 wrought was unprecedented. This new normal will likely require a top-to-bottom review of the compensation structure, scenario planning, and modifications to incentives going forward.
Figure out the immediate needs of the company vital to meeting essential needs. Achieving specific outcomes is simple when moving to strategic, operational, or individual metrics. The following metrics need to be considered if liquidity is a significant concern
Changes established need to be communicated to stakeholders to ensure that discretionary actions can be justified through performance
- Figure out the immediate needs of the company vital to meeting essential needs. Achieving specific outcomes is simple when moving to strategic, operational, or individual metrics. The following metrics need to be considered if liquidity is a significant concern
- Expense management
- Specific cash flow metrics
- Changes established need to be communicated to stakeholders to ensure that discretionary actions can be justified through performance
Performance and Payout Leverage
Setting the threshold level of performance lower than in the past will help in driving performance. This can be balanced with
- A lower payout for threshold performance
- A wider range between target and maximum payouts
- Adapting the overall payout calculation based on current needs
How can Zaggle Propel help?
With the pandemic leaving uncertainty in its wake, we understand the imperative to maintain a great working relationship. We are committed to developing the best tools for companies to serve their channel partners better.
Our team equipped with our tools and services will ensure a smooth transition with high performance. Zaggle Propel comes with an intuitive interface, centralized dashboard, and customizable integrations capable of working with complex, multi-level KPIs.
Zaggle Propel is built to strengthen and maintain engagement for employees, consumers, and channel partners.
Please reach out to us in case of any queries.