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Annual Incentive Plan Design

An effective annual incentive program should be linked to key business drivers and compensation strategy.

Cogent assists leading US companies with the design and communication of annual incentive programs for executives (and the broader employee population). We design programs by working through the complete development process and can also assist with specific updates to an existing plan.

Our annual incentive plan design services include:

  • Identifying key performance drivers. We perform correlation analyses that help identify linkages in share price performance to specific corporate financial measures. Once appropriate measures are identified, these can be used in the annual or long-term incentive program to measure performance.

  • Setting target award levels. We evaluate the competitive market and develop target award levels, minimums and maximums for the executive and employee population. We incorporate the company's compensation strategy and our understanding of the market in setting the appropriate award levels.

  • Defining funding parameters. Annual incentive plans require specific terms to be defined that determine if and how bonuses will be paid. These funding features are specific to each company's strategy and culture. Our consultants have the experience to understand which funding approaches are effective given each company's unique stiuation.

  • Evaluating the role of discretion. In today's environment, the term "discretion" can have a negative connotation in administering annual incentive plans. However, some industries and certain situations benefit from the prudent application of discretion. We advise clients on the appropriateness of discretion in annual incentive plans.

  • Optimizing the deductibility of compensation over $1 million. IRS Code Section 162(m) rules significantly influence the incentive plan design process. Our consultants have extensive experience in designing plans, optimizing the motivational affect of the plan as well as the deductibility of payments.