It pays to perform.

• Author: McMillan, John D.
• Position: Managing incentive compensation - Compensation

As companies tighten the links between their financial results and incentive programs, financial executives will be charged with developing and applying new performance yardsticks.

Across the United States, boards of directors are tying the compensation that executives receive to the financial results of the companies they manage. Companies are adopting new incentive plans, putting a higher percentage of income at risk, extending incentive plans lower in the organization and placing greater emphasis on stock and long-term incentives. The emphasis on incentive compensation has increased the importance of the financial measures used to evaluate company, departmental and individual performance, and this in turn has increased the role of senior financial executives in developing incentive programs.

In the 1990s, the use of incentives has become almost universal for top management positions. In most industries, 90 percent or more of all major publicly traded companies provide cash incentives for top management. Even among utilities -- the last bastion of the salary-only approach among for-profit employers -- almost 90 percent have adopted annual cash incentives for management, up from 65 percent as recently as 1988. Since nearly all companies now provide incentives, there has been relatively little growth in the percentage of companies using incentives for top management, but there has been substantial growth in the size of incentive awards.

Top management compensation levels are summarized in the figure shown on page 50. Compensation varies substantially based on the size of the company, as measured by revenue in this analysis. While salaries have increased approximately 25 percent over the last five years for top management positions, bonuses have increased far more. The dollar amount of average bonuses for CEOs has increased 45 percent, while it's up 43 percent for CFOs and over 34 percent for both treasurers and controllers.

A comparison of the average bonus (as a percentage of salary) paid in 1993 and in 1988 is presented on page 49. This increase occurred despite overall levels of profitability that were good but not great in both time periods.

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By far the most significant trend over the last five years is toward including more employees in incentive plans. Companies have achieved this both by lowering the minimum level of employees eligible to participate in the general management-incentive plan and by...