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A Behind-the-Scenes Look at Annual Incentive Plans

February 12, 2015

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The economic and regulatory climate of recent years has brought increased scrutiny to the structure and mechanics of executive incentive programs. Annual incentive plans, which typically represent 20–25% of total direct compensation, are a key component of the compensation program that companies can use to promote greater alignment between executive pay and company performance. These plans are generally cash bonuses paid early in the following fiscal year based on performance against specific measurement criteria in the prior year.

As many companies have sought to tie a greater portion of compensation to performance, our client’s interest in the numerous and complex features of annual incentive plans has significantly increased. One of our recent custom research projects analyzed annual incentive plans for named executive officers at 19 companies in the most recent fiscal year and provides insight into how firms are designing short-term incentives to ensure that the level of payout corresponds to the level of performance.

One company included in the analysis was Juniper Networks, which allocated a 50% weighting to a financial metric, non-GAAP corporate operating margin, with the remaining 50% allocated to non-financial metrics including customer satisfaction, products built, and market share gains. Additionally, the plan incorporated a multiplier based on 2013 revenue growth. These metrics were the same for each of the company’s named executive officers.

The company’s CEO, Kevin R. Johnson, earned an overall payout of $1,756,563, or 100.4% of target, under the plan after the operating margin metric achieved 115% payout versus target, the revenue growth resulted in a 110% multiplier, and the strategic metric achieved 74.25% payout versus target.