Private Companies Rely on Short-Term Incentives to Reward Employees
No author cited
WorldatWork and Vivient Consulting, October 2007
Available
online (press release)
Eighty percent of companies recently surveyed by WorldatWork have short-term incentive (STI) or bonus plans in place for employees. In contrast, only about one-third of respondents report having a long-term incentive (LTI) plan in place, primarily due to the cost and complexity of implementing such a plan. By far, the most popular type of STI plan is a bonus plan. Nine out of 10 private companies in the survey with an STI plan have a bonus plan.
The study found that private companies’ approximate budgets for STIs range from two percent to 12 percent of operating income, with six percent being the median. The budgets were fairly consistent across companies of different revenue sizes.
Private companies face unique challenges when designing both short and long-term incentive programs. Challenges include a lack of liquidity for equity, costly or difficult equity valuation, complexities arising from the ownership structure and competitive data that are geared to public companies.
Private companies rely more heavily on short-term incentives, such as bonuses, than long-term incentives to reward and motivate employees, according to the study. Where long-term incentives are used, they are reserved for the upper levels of the organization. Both short-term and long-term incentives are a form of "variable pay," also known as pay for performance.
The survey of 300 private companies represented business and professional services; manufacturing; financial services and insurance; retail, wholesale and distribution; health services and high technology. The size of responding organizations ranged from $100 million to more than $5 billion in revenue. The corporate status of responding organizations was primarily C Corp. (37 percent), LLC (26 percent) and S Corp. (20 percent), with a small number of subsidiaries (4 percent) and partnerships (3 percent) also participating.