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Indexed Bonus Targets

With Indexed Bonus Targets, you reward only true operating performance, independent of the economic cycle and other external effects. Your bonus system itself doesn't need to change, only the bonus targets are reset.

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Indexed Bonus Targets...

  • ...are fairer for executives and fairer for shareholders, because they reward only the true operating performance, independent of business cycles and other external factors.
  • ...prevent both excessive and deficient bonus payments, which often result from existing bonus plans
  • ...can pay out-performers high bonuses even in a recession

Compared with the Bonus Index, Indexed Bonus Targets provide more flexibility to design targets based on your specific needs.

Example

In the example below, one can see that despite higher EBIT in 2007 (6.0% vs 5.0% in 2005), performance is weaker in 2007 than in 2005 (Operating Rank of 28 in 2007 versus rank of 75 in 2005, see graph above right). Indexed Bonus Targets would have led to higher bonuses in 2005, because performance relative to the market was better than in 2007.

Year 05

       

Year 07


EBIT 5.0%
Rank: 75

 

EBIT: 6.0%
Rank: 28

Depending on which financial metrics companies use, Obermatt recommends one of the following three options for indexing bonus targets:

  • Operating Alpha bonus targets: supports use of financial ratios, e.g. sales growth, EBIT margin, return on investment (ROI)
  • Operating Index bonus targets: supports use of absolute financial goals, e.g. sales, EBIT, Economic Profit or cash flow as absolute amounts
  • Operating Rank bonus targets: can be used regardless of type of financial metric and also takes into account the volatility of the target, eliminating the need for bonus sensitivity calibrations. It can also be used with corresponding values (goal, sensitivity, etc.) in different business areas and functions. The Obermatt Bonus Index is based on the Operating Rank.