Why? Two reasons, primarily.
1. Because I believe that when you put a portion of an employee's pay at risk based on something, you owe them as clear an explanation as possible -- in writing -- about what that something is and what must happen in order for them to earn the money.
2. To paraphrase a famous quote, stuff happens. There are a wide range of circumstances that can arise during the course of a plan year -- on the side of the employee or the employer. These range from something as basic and predictable as a participant resigning, retiring or going on disability leave to the employer encountering unanticipated economic or operating circumstances. In view of this reality, it's important to be as clear as possible about how award decisions will be made under the scenarios you can anticipate and about your discretion in handling those you cannot.
Variable pay plans, in particular, are a contract of sorts with an economic exchange at their core. As such, their effectiveness is contingent on a level of trust in the employer. Squander that trust just once -- something amazingly easy to do with an undocumented plan -- and you'll have a deep hole to climb out from if you ever want to try tying pay to performance again.
What is a plan document and what should it contain? Here, from my own experience, are a few of the basics.
Introduction. This section is typically used to highlight the purpose and objectives of the plan.
Plan Design. This section reveals the structure of the plan, details award opportunities and performance metrics, and lays out how the plan works mechanically. Essentially, this part of the document should explain clearly to a plan participant how he or she earns an award.
Plan Administration. This section typically lays out all the administrative features of the plan. This includes who is eligible, the plan year, what happens to awards in the case of termination, disability or death, and the necessary legal language and requirements. Additionally, this is the place to note who serves as Plan Administrator and clarify what that individual's/group's rights and responsibilities are relative to the plan.
Signature. I also favor a signature block where plan participants, by signing and dating a copy of the document, testify that they have read the document and agree to participate in the plan on the terms outlined there.
What's your position on plan documentation? What key sections and/or features do you feel are helpful and important beyond the basics that I've outlined above?
Ann Bares is the Founder and Editor of the Compensation Café, Author of Compensation Force, Managing Partner of Altura Consulting Group LLC, and a proud co-author (along with Cafe cohorts Margaret and Dan) of the newly published book Everything You Do in Compensation is Communication. Ann serves as President of the Twin Cities Compensation Network (the most awesome local reward network on the planet) and is a member of the Advisory Board of the Compensation & Benefits Review. She earned her M.B.A. at Northwestern University’s Kellogg School, is a foodie and bookhound in her spare time. Follow her on Twitter at @annbares.
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