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. 

Incentive compensation can sometimes be the "dirty little secret" of corporations.  Executive compensation is often "public information" - public companies must reveal the compensation packages of key executives.  Private companies are not required, but often there is a board of directors aware of, and monitoring the compensation packages of executives.

However, the sales force, earning incentive compensation packages, often lacks any transparency.  The "hard" numbers are known - a sales person's base pay - but the overall package, once incentives and bonuses are paid, can be a "hidden" number.  Perhaps the CFO is looking at the total pay of top sales earners; perhaps not. 

The lack of transparency in incentive compensation packages is more a result of out-dated processes than a deliberate action to hide the total numbers.  Out-dated processes for incentive compensation include managing earnings and payouts on multiple spreadsheets, lacking formal processes for disputes, an inability to document and track adjustments to compensation and even lacking a single source to track both base pay and incentive pay.

Companies that lack comprehensive Incentive Compensation Management systems and processes will soon find themselves up against regulations.

In December 2009, the Securities and Exchange Commission passed regulations regarding incentive compensation for institutions under their rule.  The regulations come out of the recent financial crisis; the goal is to create accurate risk management of incentive and variable compensation plans.  All institutions overseen by the Securities and Exchange Commission will need to adhere to these regulations.

What can organizations expect in these new regulations for incentive compensation?

• Stricter reporting requirements
• Limits on the total amounts paid
• Audit and traceability restrictions

Companies need to assess how they are currently tracking, monitoring and measuring incentive compensation and understand if those processes will provide the transparency and information required of the new regulations. 

The days of tracking incentive compensation on multiple spreadsheets are soon ending.

These institutions may be the first to change how they manage incentive compensation, but others will soon follow.  Will you be ready to make that change?

For more information on incentive compensation and regulation, sign up for an April 28 Webinar, at:  http://www.revelwood.com/news_and_events/events/spm_webinars/default.htm .