Your next
compensation
design project
starts here.
By Evelyn Johnston,
Blue Shield of California
Looking to make an impact in
compensation? Learn to design it.
The difference between a poorly
designed incentive plan and a
strategic one has a significant impact
on bottom-line results. Ultimately,
as a compensation expert, you
will be called on to undergo an
incentive review, and you will
need a methodology that will help
you navigate through the process.
Moreover, with the most recent
recession came increased scrutiny
and oversight of incentive plans and
design. Today, a large majority of
compensation teams is being asked
to review their incentive plans
or redesign them, particularly as
organizations increase in size and look
for profitable growth. Many of these
organizations elicit the services of
consulting firms, while others do the
work internally. The following design
review process model can guide total
rewards professionals through their
next compensation design project.
The compensation design review
process is essentially a toolkit used
to facilitate discussions with human
resources and an organization’s busi-
ness partners to clarify the overall
process, including stakeholders, roles,
governance and approvals. There are
four key stages in the process.
four stages of successful
compensation
designreview
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48 | workspan march 2014
Stage 1: Project Initiation
and Scoping
The project initiation and scoping
stage includes annual design reviews
and/or business-initiated requests
made throughout the plan year.
This step of the process typically
includes a meeting conducted in
partnership with business leaders,
human resources and the compensa-
tion department. (See Figure 1.) It
is also typical for a project team to
be made up of different functional
areas to execute the steps undertaken
during the review. Through this
step of the process, an executive
champion identified to help steer
the design decision making and the
group gains an understanding of the
business context, design scope and
project timelines. Important details
like the business needs for change,
high-level understanding of require-
ments, and readiness for the project,
stakeholders and working committee
contacts, estimated timelines, design
plan status and leadership approval
of the initiative are also defined.
Key questions are articulated during
this scoping stage:
Current and future business strategies
1 | What are your short- and long-term
goals and objectives? How often
do they change (e.g., key business
objectives: growth, retention, profit-
ability, volume and referrals)?
2 | Do you have a strategy
solidified to meet the goals?
3 | What challenges may keep you
from meeting your goals?
4 | Have metrics been established
that tie to business success and
driven by behavior supported
by the incentive program?
5 | What are the desired key business
performance metrics to evaluate
results? Can these be measured
accurately and on a timely basis?
6 | What are the inherent risks in
the business and the controls
in place to mitigate?
7 | Who are the key competitors?
8 | What does the target-setting
process look like?
9 | What is the timeline for rolling
out the incentive plan?
Current and future
workforce strategies
1 | What are the major roles
and responsibilities in the
position(s) under review?
2 | What are shareholder optics (will
plan apply to executive officers)?
3 | Is the business in a state of growth?
Are you increasing headcount?
4 | What is the philosophy:
workforce progression, develop-
ment curve, key skill sets and
core competencies required?
5 | Do you have any issues with attrac-
tion, attrition, motivation, retention?
Where is your workforce located?
Any geographical concerns/issues?
1 | Incentive plan strategies
2 | What are the desired or undesir-
able behavioral outcomes?
3 | Does the current program
pay competitively?
4 | What is working well in the
current plans and what is not?
5 | What would you add, edit
or remove from the current
plan and why?
Figure 1 | Incentive Design Review Model
1
Project Initiation
& Scoping
Initial meeting:
Business
context
Design scope
Key dates
Internal/external
data collection
Current plan design
assessment
Business strategy, roles
and compensation
elements
Competitive market
research
Company’s compensation
philosophy alignment
Modeling and
analysis
Quantitative and
qualitative analysis
Back testing
Stress testing
Cost impact analysis
Employee and
business impact
analysis
Recommendation
Features
Design framework
Governance model
Risk impact
Plan administration
Forecasting approach
Communication and
change management
strategy
Communication
rollout
System
implementation
Compensation and
HR leadership
Where applicable,
compliance, risk,
audit and legal
concurrence
Business leader
(approve)
Compensation
committee
approval
(material plans)
2 Incentive Plan Design
Regular checkpoints with business leadership (and socializing with key
stakeholders) as applicable; audit, compliance, legal, finance and risk
engaged for material plan changes approvals
3
Approvals
4
Communication
& Implementation
Change management strategy/planning and communication strategy/documentation occur throughout the design process.
Major review/new plan
24–34 weeks
2–4 weeks 4–6 weeks 6–8 weeks12–16 weeks
Plan review/minor change
16–24 weeks
2–4 weeks 4–6 weeks 6–8 weeks6–8 weeks
Feedback loop and diagnostics after rollout – plan monitoring, forecasting, awards

52 | workspan march 2014
Based on the outcome of the project
initiation and scoping phase, there
may be issues that will impede the
successful launch of the incentive
plan. The business may still request a
plan design; however, the compensa-
tion team will need to convey areas
of concern associated with (but not
limited to) the following:
❙❙ System (IT infrastructure) limitations
❙❙ Plan measure limitations (cannot be
measured or tracked and/or goal
setting is inadequate or flawed)
❙❙ Role/job content is not clear and/or
too many or too few levels (requires
organization development assessment)
❙❙ Talent management (current popula-
tion is not the right fit for the future
state of the business strategy)
❙❙ Design request is not aligned or does
not support overarching (“top-of-
the-house”) business strategy goals
❙❙ Timing of the implementation.
In some cases, the business may
request a design change without
having identified the underlying
issues. It may be determined through
the project initiation and scoping
phase that the underlying issues are
not related to the incentive plan but
rather the existing plan is not well
understood, fully leveraged or has not
been given enough time and traction
to succeed. A re-education/commu-
nication process may be required to
use the existing plan as an interim
solution. The group may explore
the following areas to confirm that
compensation is not the issue:
❙❙ Competitive market positioning over
the past three years (if feasible)
❙❙ Turnover of high-performing incum-
bents over the past three years
❙❙ Exit interview details of
high-performing incumbents
❙❙ Comparative market
practices (if feasible)
❙❙ Target/goal setting
❙❙ Lack of education or understanding.
Stage 2: Incentive Plan Design
The incentive plan design phase is
coordinated by the compensation
team and includes the following key
stakeholders: compensation, finance,
business leaders and other internal
functions (e.g., risk, compliance, legal,
finance and audit). The key steps are
outlined in Figure 2. The components
of the incentive plan design are
included in this stage. It is important
that the plan design expectations
are clear before reaching the final
stages (approvals and communication
and implementation).
Cost impact
The outcome of stress testing and
back testing is a cost sensitivity
analysis. This analysis is based
on comparing the existing plan or
current plan design (if applicable)
versus the new proposed plan design,
or providing an estimated cost anal-
ysis on the new proposed plan.
Stage 3: Approvals
This stage of the design review
process involves synthesizing the
information for approval grouped
into the following headers:
Business strategy summary
Typically includes a summary of the
business line/segment goals and
Figure 2 | Key Steps Included in an Incentive Design Review
Design philosophy
Performance principles
Research and analysis
Recommendation or
final proposal
Data collection
1Design philosophy includes alignment of plans
with strategic business unit goals and plans and
shareholder interests, and effective risk management,
pay for performance, ensuring plan design supports
compensation philosophy, competitive market
practices and governance.
2Performance principles ensure that plan
designs consider market best practices and
key performance metrics.
3Data collection provides compensation with
background information needed to begin the
research and analysis process. This includes
existing plan reviews, role and job analysis, existing
compensation data review, detailed scoping, business
performance data review and market intelligence,
including data analysis.
4Research and analysis includes verification and
validation of data, stress testing1
, back testing2
,
running what-if scenarios, costing and modeling.
These steps may vary based on the needs required
for each plan design.
5Recommendation or final proposal summarizes
the plan design features and framework:
❙❙ Role
❙❙ Compensation: base, incentive, pay mix,
total compensation
❙❙ Target award/eligible earnings (leverage
(e.g., minimum, target and maximum payouts))
❙❙ Key performance metrics and weightings
❙❙ Performance and pay frequency
❙❙ Leverage (thresholds, hurdles, upside
potential and caps)
❙❙ Consideration of balancing of inherent risks.
❙❙ Stress and back testing and cost impact analysis.
1: Stress testing = “predictive outcomes.” Stress testing defines a scenario or various what-if outcomes to determine the
expected impact on the plan design should such scenarios occur. For example, what if the component exceeds plan by X percent?
What if the component coupled with another component results in X? This analysis reveals how well a plan design is positioned in
the event forecasts do not prevail. Stress testing also lends insight into a plan design’s vulnerabilities. Though extreme events are
unlikely, studying their performance implications strengthens the overall understanding of the design.
2: Back testing. In conjunction with the stress testing, if historical plan results (including current results) exist, you will be able to
back-test the historical/current results using the proposed plan design. If historical results do not exist, you will provide the straw
model outcomes of “minimum, target, maximum.” Typically, the back test is a minimum of one past year plus the current year. The
back test involves applying the proposed plan design based on historical/current results. This provides predictive insight into the
expected incentive impact if the proposed plan design had been implemented earlier.

| 53march 2014 workspan
objectives, and demonstrates the link
between pay and performance. This
may include three to five key objec-
tives, such as profitability, volume
growth and customer focus.
Current and proposed plan
design framework
Typically, highlights the vari-
ance between the current and the
proposed plan design, the benefits
of the proposed changes and the
simplicity/degree of complexity in
the proposed plan. This may be
illustrated in a table highlighting the
proposed changes. Key messaging
includes the benefits of the changes
in relationship to the alignment to
business needs, risk balancing and
cost impacts, etc.
Market intelligence
A summary of market information and
recommendations may be provided.
This may include:
❙❙ A view of the current state of
employee compensation
❙❙ Market summary
❙❙ Variance to the market.
Costing summary
The cost impact, stress-testing and
back-testing analyses are captured
during the incentive plan design
phase. A summary of this informa-
tion is provided to illustrate that
the proposed plan is fundable and
foreseeable financial considerations
for the plan have been captured.
Additionally, a stress-test summary
should be provided as part of
the costing summary. This would
include a table summarizing the
cost impact of the stress-testing
analysis performed during the
design phase. A back-test summary
demonstrating year-over-year compar-
isons should also be provided for
existing plans only.
Legal, risk and compliance
assessment summary
A risk assessment involves gaining an
understanding of the inherent risks of
the business, which may be encour-
aged by the incentive program, and
the balancing mechanisms that are
being applied to ensure the incen-
tive program reinforces the correct
behaviors and mitigates the risk. It
is here where identification of any
unintended consequences of the
design would be included. Likewise,
a compliance assessment involves
understanding the process controls
in place to ensure unintentional
gaming of the plan. Legal is also a
key stakeholder in the process and a
review of the plan design is necessary
to ensure compliance with appli-
cable laws. The key message in the
summary should be that the proposed
plan balances material inherent risk
incented by the plan.
Stage 4: Communication
and Implementation
This is the last step of the design
review process; it is formally
launched when approvals for the new
plan or plan change(s) are obtained,
although work related to the imple-
mentation occurs throughout the
project, including system require-
ments, if applicable. There are
several aspects to consider when
implementing a new plan or a plan
change(s). (See Figure 3.) As part of
change management, consideration
should be given to assessing organi-
zation and employee readiness for a
new or enhanced incentive program.
This assessment may be conducted
by evaluating the results of employee
engagement surveys/exit interviews
and discussing the company culture
with senior leaders/human resources.
Conclusion
Instilling a design review model into
your internal incentive review process
will ensure you have a well-developed
methodology to facilitate discussions,
clarify the overall process and ensure
a rigorous analytical approach. Further
developing compensation design
capabilities is increasingly important
as incentive plans will continue to be
under the microscope as a means to
drive profitable growth with a view of
taking well-governed risks in doing so.
As a compensation expert, you play a
key role. It is critical you ensure that
compensation design links to business
success, driven by a well-established
incentive program.
Evelyn Johnston is vice president of
total rewards at Blue Shield of California
in San Francisco. She can be reached at
evelyn.johnston@blueshieldca.com.
Figure 3 | Key Aspects to Implement an Incentive Plan
Implementation Phase
Plan
documentation
Plan document
Plan summary
Plan inventory
update
Communication
strategy
Communication
plan
Change
management
Communication
rollout
System
implementation
Forecasting and
reporting
Award
calculation
Participant
statements
Annual update to
plan inventory
Monitoring and validation
of plan design
Systems update
(if applicable)
Forecasting and accruals
Award payout approval
Communication
Other
considerations
Ongoing management
resources plus
For more information, books and
education related to this topic, log
on to www.worldatwork.org and
use any or all of these keywords:
❙❙ Compensation
❙❙ Incentive plan – design
❙❙ Incentives.