Creating a Variable Pay Plan

Legal Review

A variable compensation plan document will include a formal legal review to ensure compliance with applicable wage and hour laws and other legal requirements.

An up-to-date legal review is important due to the changing legal environment. A legal statement within the plan document may include:

• Who approves payouts and exceptions under the plan?
• Who defines and interprets organizational performance and individual performance?
• Who is responsible for administration of the plan and who is responsible for resolution of issues under the plan?
• How is the plan managed in the event of change in control?
• What are the confidentiality expectations?
• Who has the right to review, alter, amend, or terminate the plan at any time?
• A statement such as the plan does not constitute a contract of employment or alter the at-will employment relationship between an employer and employee.
• Any other revisions or statements as recommended by your legal counsel during the up-to-date legal review.

Approval

A variable compensation plan is an important plan and critical to the organization’s strategic operating plan. Top management will typically take an active role in the design of key provisions of an important variable compensation plan. Top management or the Compensation Committee of the Board of Directors will approve the final plan design and payouts under the plan.

Ongoing Communication

Ongoing communication with management, eligible employees, and key administrators is critical to ensure the success of a variable compensation plan. Ensure your plan addresses:

1. communication for the roll out of the approved plan
2. progress towards objectives during the performance period
3. final attainment
4. payout provisions

Payout Planning and Procedures

Once the performance period has ended, payout planning provisions should take place. Will management provide performance input to determine attainment of MBOs or other performance criteria? Who provides the key information on financial or non-financial metrics? The final payouts should be calculated and validated.

Once the final payouts under the plan have been calculated and approved, final approval should be obtained from top management or the compensation committee of the board of directors.

Ensure detailed procedures are in place for payroll to processes payouts accurately and on time under the plan.

Critique of Plan for Future Improvements

A variable compensation plan should be evaluated to ensure ongoing improvement. Key users’ input is valuable to ensure the best design and administration of the plan.