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Bonus Targets
Obermatt Operating Alpha Bonus Targets make use of the ability to compare KPIs from different time periods through indexing operating performance and converting absloute value performance metrics to relative value percentile ranks.
As detailed in the previous sections on value-based managemnt (VBM) and incentive pay in general, incentive compensation is an essential part of any VBM system. But while the use of value-based incentives goes a long way towards aligning the interests of managers and shareholders through performance pay, a number of problems remain, all due to the fact that unlike Obermatt bonus targets, traditional bonus targets are almost always in absolute values. Innovations like the bonus bank generally do a good job of contending with one of these problems inherent in absolute bonus targets: the dangers of encouraging short-sighted management that sacrifices long-term value creation for short-term performance. But they still leave bonus systems largely open to the problems of financial volatility and sandbagging.
Only indexed operating performance relative value bonus targets can fully solve these intractable problems:
- Percentile rank targets cannot be sandbagged or gamed in any way. No matter what trends are occurring in the industry or economy as a whole, managers must still do their best to outperform their peers under any conditions. Since there is no absolute target in sight, the goal of improving percentile rank is always present, and managers must continue to work towards it. Achivement of bonuses cannot be known for certain until the end of the period.
- Percentile rank bonus targets do not rise and fall with the volatile economic tide. Companies avoid excessive spikes in bounus payouts in up-cycles, as well as overpaying underperformers. Companies simultaneously avoid retention risk: underpaying deserving top performers in down cycles.
Indexed, percentile rank relative bonus targets are more demanding, more fair and valid, more transparent and better for morale, more motivating and aligned with shareholders interests, less volatile, and immune to sandbagging.
Click here for more information on Obermatt Operating Alpha Bonus Targets.
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