Radford Compensation 101

Chapter 6: Variable Incentives

Cash Awards


You’ve heard the expression "Cash is King," and when it comes to short-term incentive rewards, it certainly rings true as most incentives take the form of a cash payment. It's not as simple as writing a check, however. Cash awards require careful plan design considerations, similar to any other rewards-based system. 

Performance Recognition

When we look at formal cash incentive plans, they can generally be grouped into one of two types:


Foresight Perspective:

The more common of the two approaches, the basic philosophy of foresight perspective is: “If you help us meet our goals, you will be rewarded.” This plan type generally includes a formal bonus, which is typically funded by the company's performance and directed to members of a group – either management, top-performers, customer-facing employees, etc. The target can be set as a percent of salary or as a dollar amount, and payment is generally tied to the performance of the employees and objectives that are set with eligibility established at the start of the bonus plan period. Another way to set the target is with the companywide profit-sharing plan, which gives equal awards to all, but is still funded by company performance and distributed to members of the organization. The amount earned is typically based on a percentage of salary or a dollar amount for every employee. While payment is usually not tied to personal performance, it’s often tied to eligibility based on a minimum performance level and date of hire. 


Hindsight Perspective:

In contrast to cash incentives that look ahead at the start of the plan year, sometimes employees display a high level of performance without a formal bonus plan in place and need to be rewarded in hindsight for their efforts. Hindsight perspective can be thought of as a discretionary bonus or thank-you gift for these employees, and are typically given without expectation and independent of any previously received awards. The payment size may be based on guidelines, but it may also be tied to individual situations. They are typically smaller in size and could take the form of tangible goods or services vs. cash. This type of award provides managers the freedom and flexibility to act when needed on a case-by-case basis.


Plan Design Considerations

Cash awards, like all other forms of rewards incentives, require careful plan design considerations to be effective. Here are some key questions and factors to consider as it relates to the who, what, when, where and why. 

  • Who is eligible to participate?
    Is HR or line management the driver of these eligibility considerations? How do you approach mid-year hires, people who transfer into the organization, those who go out on medical leave or employees who leave the company before the bonus is paid out? Would these people be eligible for anything? Setting the design rules up front is key.
  • What is the appropriate vehicle for delivery?
    Typically cash is used for short-term incentive plans. For long-term incentives, an equity vehicle such as stock would be more appropriate.
  • Where does the reward money come from?
    It depends on the organization. Some sacrifice bonus money from the merit budget or some other budgeted source, but it could come from incremental revenue or increased profits.
  • When are goals set? When are rewards paid?
    Doing so annually is common, but it may be more appropriate to set milestones and offer payment more frequently, such as on a quarterly basis.
  • Why are we doing this?
    Are we trying to drive growth or do we want to target some outcomes within the organization, such as increasing quality of products or improving customer satisfaction?
  • How much will it cost?
    Is the incentive plan within our budget and what do our competitors offer?

You may want to use cash incentives because other companies are as well, but you may also want to temporarily use a plan to focus on results in a specific area. You don’t have to follow what the market is doing to the last dollar as long as your total compensation package is competitive. Either way, you'll want to make sure that whatever works is used effectively and monitored along the way to drive success.

What Great Cash Incentive Plans Have in Common

Every company's cash incentive plan is tailored to suit their needs, but successful ones share some common themes. They tend to:

  • Use a limited number of clearly defined and easy-to-understand metrics that motivate the right actions;
  • Have a solid plan design and well-articulated rules that limit the controversy about eligibility or payment and have clear expectations of performance;
  • Balance the needs of the business, customers and employees;
  • Keep employees focused on goals that matter with upside opportunities as well as fairness protections;
  • Support the business model with cascaded objectives, which are objectives of individual employees that tie in to the goals of higher levels of management; and
  • Not reward bad performance or bad behavior – for example, unintended consequences that the plan might motivate, such as people taking shortcuts.

Framework for Incentive Considerations

Since cash is used in most short-term reward/recognition programs, figuring out both a funding scheme and a distribution scheme for that money is necessary. Here's a bit more on what these monetary considerations include:

Funding Scheme

Translates source of money to an actual amount of money made available for distribution.

  • How well did we perform as a team to have these funds available to us?
  • How much money is available for distribution?

Distribution Scheme

With money taken from the funding scheme, how much money is now allocated to individual employees.

  • How well did you perform to get a monetary amount that is fair for you? 
  • How much does each person get?

Additional Incentive Funding and Design Terms

  • Threshold/Minimum: This relates to the level of performance required before any money will be available for awards; few plans pay incentives without some minimal performance level.
  • Target: This is the amount of money made available as a result of performing as expected. It’s important to gauge how much money you want to spend and the level of performance it requires to receive this reward.
  • Slope: This is the rate at which funding or awards changes based on changes in improvement. Typically as performance improves, there will be more money available.
  • Cap/Maximum: This is the limit beyond which additional performance will not result in additional reward. You will want to consider whether a maximum creates a disincentive for spectacular results or just reflects a reasonable limit that could prevent overpayment.

Survey Scenario - Cash Incentive Examples

Cash Incentive Participation by Job Level

Below we're taking a look at the cash incentive participation by job level at a sample organization for the U.S., U.K. and India pulled from the Radford Global Technology Survey. Data shows job level is a great predictor of the level of participation and the likelihood of receiving a bonus. The higher up you go in the organization, the more likely a bonus will be paid.

Job Level Employee Participation
U.S. U.K. India
Eligible Receipt Eligible Receipt Eligible Receipt
Executive 97% 80% 97% 85% 97% 60%
Director (M5) 95% 80% 95% 75% 95% 60%
Manager (M3) 85% 70% 95% 65% 95% 50%
Senior Individual Contributor (P5) 80% 65% 95% 65% 95% 35%
Individual Contributor (P3) 75% 60% 75% 50% 90% 25%
Support 60% 45% 60% 40% 60% 25%

Source: Radford Global Technology Survey

The three parts of the world shown here show that eligibility is tied to job level, and is consistent among all countries. But eligibility does not mean the same in terms of the receipt rate in every country. In India, for example, eligibility is higher than the U.S. for some jobs, but receipt is less likely. That's why it’s important to look at the receipt rate for a measure of what people are actually doing. It’s also important to note that practices can vary by country. That’s why it’s important to look at the practices in each market where your organization has operations, and not just take the practices of one country and apply them blindly in other markets.

Metrics in Bonus Plan Performance Measures

Not only does the rate of participation vary by job, but the metrics used to measure performance vary as well. The following chart features data from a Radford Practices Survey, and shows how differently company and individual performance can factor into our judgment of the performance or the funding of the plans.

Performance Metric CEO Executive Manager Individual
Corporate 76% 60% 41% 40%
Unit/Dept./Team 9% 18% 23% 20%
Individual 15% 22% 36% 40%

Source: Radford US Practices Report

Here we see that for CEOs, corporate performance is more than three-quarters of the metrics being used to judge performance; while for individuals, generally a 40% is put at the individual performance level where some component of company or unit performance is important to judge. Higher job levels generally focus attention on company performance, whereas lower levels increase the percentage of focus on the individual.

Cash Incentive Example

If we put these terms and concepts together in a picture, it will resemble the image below, which reflects the combination of a threshold and a cap. This particular plan doesn’t offer any reward until you get to 70% performance achievement along the x-axis, and then jumps to paying 100% of the target at 100% performance and 200% of the target paid at 130% performance achieved with a cap above that level. With this particular plan design, we see a 3.33% of the target award added to the pot for each 1% of performance above that threshold level with a maximum payment of twice the target.

70-130 Plan (70 threshold/130 cap)

After the results of the company’s performance are known and the money is available, you will need to decide how much the individuals will receive. In a growing number of cases, that’s not just reflective of how much the plan pays, but determining if everyone on the plan performed equally well. If the answer is no, it’s appropriate to use some individual modifier or team performance measure to distribute the money.

US Target and Actual Incentive Received

Let’s turn now to how much money individual people will receive. From the chart below, with U.S. target and actual incentives received for management and professional jobs by level, we can glean a few interesting insights.

Category Average Bonus as Percent of Base Salary
Level 6 Level 5 Level 4 Level 3 Level 2 Level 1
Last Year Target 29% 23% 16% 13% 10% 8%
Last Year Actual 30% 22% 16% 12% 9% 8%
Current Year Target 29% 23% 16% 13% 10% 9%
Last Year Target 21% 14% 11% 9% 8% 7%
Last Year Actual 19% 13% 10% 9% 7% 7%
Current Year Target 20% 14% 11% 9% 8% 7%

Source: Radford Global Technology Survey, average undiluted actual incentives paid

First, the bonuses are typically larger as a percent of salary at higher job levels. More pay is at risk and more potential upside exists at higher levels. Additionally, bonus targets don’t seem to change much from year to year. Over the last several years, the bonus targets by level have been relatively stable, so actual bonus rewards will reflect the actual performance of companies and in plan years, some companies have bad years or good years, so we’ll see fluctuation in the actual data much more than in the target data.

How Incentives Connect With Performance Management

All of the examples mentioned above tie into, and play a role in, performance management. Whether you are using performance as justification for a salary increase or as documentation supporting a promotion recommendation, knowing what good and great performance looks like is critical. In addition to determining reward size, quantifying and defining goals and measuring achievements helps employees identify areas for improvement.

Performance management contributes to incentive plan award design and delivery, even if a company has moved away from traditional individual performance ratings. Overall organization or group performance can help determine the amount of money to be distributed as a whole. Team and individual contribution can influence where (or to whom) money is directed.  Manager insights and discretion can be applied (while remaining in budget) as a factor when determining how individual bonus awards are computed and paid out.


Chapter 6: Key Takeaways

  • Cash awards are the most common form of short-term incentive plans. 
  • Although it may sound simple, formal cash incentive plans require careful plan design considerations, similar to any other rewards-based system.
  • Foresight perspective plans are the more common of the formal cash incentive plans and can be thought of generally as: "If you help us do this, then you get that".
  • Hindsight perspective plans are less common and more of a discretionary bonus or thank-you gift to employees because you helped the company achieve something. 
  • There is no one-size-fits-all cash incentive plan, every company's plan is tailored to suit their own needs, however great cash incentive plans all follow some common themes.
  • A funding and distribution scheme is necessary for the successful operation of formal cash incentive plans.
Go to Chapter 7


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