Lisa Audi - Question & Answer

When is it okay to make exceptions to variable compensation program earnings or change goals?

Answer: Discretion in making incentive payouts when goals are not met should be used sparingly and consistently, and affordability is essential. Some incentive plans factor in some discretion (usually less than 20% of the incentive pool) or an organization might allocate some cash or equity payment to a future date if performance is respectable in light of some unexpected dynamics that preclude the organization from meeting its minimum financial goals required to pay out an incentive.

Ideally, goals will not change midway through a plan year, but there are some situations where this could be appropriate. If an organization loses revenue due to a customer dissolving its business or going bankrupt, for example, this is justification for goal relief. But changing goals to align with major business changes must always be balanced with affordability and reasonableness. It is quite possible that losing one significant customer will have an impact on overall financial results that preclude an organization from paying any incentive at all.

A change in goals midstream because performance is not meeting up to expectations is not advised, despite the fact that plan participants do not have influence over some external variables that impact the business. These same variables can work in the favor of the incentive plan participants, and this should not result in the goals changing to be more stringent.

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