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Executive Bonus Plans

An executive bonus plan is a compensation plan that serves as a supplement to a base salary for top-level executives.  Such a plan will help to motivate and retain executive secret weapons by aligning their interests with the interests of the shareholders of the company. There is a variety of executive bonus plans, each with its own set of features and benefits, such as cash bonus plans, stock option plans, restricted stock plans, phantom stock plans, and the deferred compensation plans. Below we have detailed some executive bonus plan examples.

Executive Bonus Plan Examples:

Executive bonus plans are designed to incentivize and reward top-level executives for achieving strategic objectives and driving company performance. Here are some examples:

1.  Performance-Based Bonus:

A performance-based bonus is a financial incentive given to employees who meet specific performance criteria, such as cost control or customer satisfaction, to motivate and reward their contributions to the company’s success.

    • 20% of annual salary for meeting performance targets
    • 30% for exceeding targets
    • 40% for significantly exceeding targets

2.  Stock Option Bonus:

A stock option bonus is a type of compensation where an employer grants an employee the right to purchase a certain number of company shares at a predetermined price (strike price) over a specific period. This allows employees to benefit from potential future growth in the company’s stock value.

    • 1,000 stock options for meeting performance targets
    • 2,000 stock options for exceeding targets

3.  Cash Incentive Bonus:

A cash incentive bonus is a type of bonus payment made in cash to employees as a reward for achieving specific performance goals, targets, or milestones. It is a one-time payment, usually made in addition to an employee’s regular salary or wages, to recognize and incentivize outstanding performance, productivity, or contributions to the organization.

    • $50,000 for meeting performance targets
    • $75,000 for exceeding targets
    • $100,000 for significantly exceeding targets

4.  Profit-Sharing Bonus:

A profit-sharing bonus is a type of bonus payment made to employees based on a company’s profits. It is a way for companies to share their success with their employees, beyond their regular salary or wages. The bonus amount is typically calculated as a percentage of the company’s annual profits, and is distributed to employees in addition to their regular compensation.

    • 10% of company profits for meeting performance targets
    • 15% for exceeding targets

5.  Balanced Scorecard Bonus:

A Balanced Scorecard (BSC) bonus is a type of performance-based bonus that is tied to an organization’s Balanced Scorecard framework. The BSC is a strategic management tool that helps organizations measure and manage their performance from four perspectives:

  1. Financial (e.g., revenue sharing, profitability)
  2. Customer (e.g., satisfaction, loyalty)
  3. Internal Processes (e.g., efficiency, productivity)
  4. Learning and Growth (e.g., innovation, employee development)
    • 20% of annual salary for meeting financial targets
    • 20% for meeting customer satisfaction targets
    • 20% for meeting innovation targets
    • 40% for meeting strategic objectives

 

6.  Long-Term Incentive Plan (LTIP):

A Long-Term Incentive Plan (LTIP) is a type of compensation plan that rewards employees for their contributions to the organization’s long-term success. LTIPs are designed to motivate employees to focus on sustained performance over an extended period, typically 3-5 years or more.

    • 20% of annual salary for meeting 3-year performance targets
    • 30% for exceeding 3-year targets

 

7.  Executive Incentive Plan (EIP):

An Executive Incentive Plan (EIP) is a type of compensation plan designed for senior executives and top management. It’s a performance-based plan that rewards executives for achieving specific financial, operational, and strategic goals, aligning their interests with those of the organization and its shareholders.

    • 20% of annual salary for meeting performance targets
    • 30% for exceeding targets
    • 40% for significantly exceeding targets

 

8.  Value Creation Bonus:

A Value Creation Bonus (VCB) is a type of performance-based bonus that rewards employees for creating value for the organization. It’s a forward-looking bonus that focuses on future value creation, rather than just rewarding past performance.

    • 20% of annual salary for creating value for the company
    • 30% for exceeding value creation targets

Note: These examples are just illustrations and may vary based on company size, industry, and performance metrics.

Remember to tailor your executive bonus plan to your company’s specific needs and goals, and to ensure it aligns with your overall compensation strategy.

 

Why do companies need executive bonus plans?

Purpose of Executive Bonus Plans:

  • Motivate and incentivize executives
  • Align compensation with company objectives
  • Reward and recognize performance
  • Attract and retain top talent
  • Drive performance culture
  • Link pay to performance
  • Encourage long-term thinking
  • Promote teamwork and collaboration
  • Enhance shareholder value
  • Comply with regulatory requirements

 

How to Create the Best Executive Bonus Plan

Whether you are creating a bonus plan for your entire company, or just for the top level executives our formula is the same.  We have created a downloadable called, 5 Steps to Build a Better Bonus Program.

 

  1. Measure Performance:

Determine what metrics, targets, KPI’s or goals define performance for each role in your organization and share those metrics in real time with your team.

  1. Link Incentives to Metrics:

Your team gets a paycheck by doing their job.  Incentives are for doing their job exceptionally well. When their performance has a positive impact on the bottom line, share in the success.

  1. Feedback: 

Establish a model for providing individuals with regular feedback and then track improvements, celebrate successes and follow up.

  1. Transparency:

Build trust by setting realistic performance targets that results in their incentives.  Make the performance data visible in real time.  Show the incentive amounts in real time as their personal performance data is updated.

  1. Automate it:

The best incentive plans are driven by actual performance data.  That data is already available in your technology stack.  Automate your incentive pan using the latest technology tools to pull that data from our HRIS, ERP, and accounting systems.

Implementing an executive bonus plan involves several steps to ensure it aligns with your company’s goals and effectively motivates your executives. Consider implementing a bonus letter to help with transparency.

 

Conclusion:

To sum it up, an executive bonus plan must be implemented carefully. This means thinking about what they want to achieve; how success will be measured; key performance indicators (KPIs); goals or targets and methods used for reaching those objectives among others. The best way to do this is by integrating the program with corporate aims. In addition, leaders should know what is expected from them so that their efforts can be channeled towards attaining desired results. Therefore, it becomes necessary to continuously monitor performance against set standards while evaluating whether changes are needed or not in order for it stay effective over a given period of time. Consequently, legal obligations must also be taken into account so as not only comply but protect against any possible dangers that may arise from such plans too. Hence a good designed and implemented executive bonus scheme motivates the top management team

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