Incentive compensation regulations are changing the way companies of all sizes manage, monitor and report on their incentive compensation plans.
The U.S. Securities and Exchange Commission (SEC) recently began requiring that public companies address their compensation and incentive compensation plans for all employees, not just executives. All public companies, regardless of size, have to identify and report on their compensation programs that present potential risks to the business.
Generally, most larger companies have automated, controlled and auditable incentive compensation management solutions, while most smaller companies still use spreadsheets to manage their incentive compensation programs.
Regardless of company size, spreadsheets will no longer be adequate for managing incentive compensation plans.
The underlying issue is risk. How risky is it for a company to not know their compensation obligations? While larger companies may be managing larger amounts of payment, smaller companies are likely to be managing larger percentages of their total revenue. A particularly good quarter for one or two high performing sales people could create a significant issue for a smaller company. What CFO wants that surprise at the end of a quarter, or the end of a year?
Incentive compensation plans can be risky. Both the company and the employee are making a bet - if the employee does X, they'll earn extra compensation. It's a calculated bet designed to drive specific behaviors from employees. But without the right automation, controls and processes, that bet can backfire on the company.
The key to avoiding surprises is to have control, visibility and awareness of potential risks. With the right approach to incentive compensation management, a CFO could know the best case and worst case scenarios for each quarter. For example, he or should could know the answer to "What is my payout if all my employees earn their quarterly incentives?" or, on a more strategic level, "How do I assess revenue and profit while factoring in compensation payouts?"
These answers not only mitigate corporate risk, but they also provide the path to more strategic incentive compensation plans. Oh, and by the way, if you are publicly traded, you'll now be required to know those answers.
For more information on incentive compensation and regulation, sign up for a live Webinar taking place on April 28.
Posted April 28, 2010 12:35 PM
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