Evaluating the Effectiveness of an Incentive Plan Design within Company Constraints

Abstract

Compensation professionals are increasingly being asked to provide empirical evidence of the effectiveness of company incentive plans. Senior management is less willing to accept plan success at face value today. However, it is necessary to conduct a systematic evaluation to connect performance improvements with plan design. The results must be significantly higher following implementation, and there must be no attribution to external sources. Within a real options framework, evaluative information is integral for making subsequent compensation resource decisions-whether or not to continue the plan or revise the mechanics. Unfortunately, the evaluation of an incentive plan may be complicated by company constraints pertaining to participation, time, and business conditions. This article describes a method for assessing incentive plan effectiveness over a brief period, which negotiates these constraints. Specifically, the “short” interrupted time series analysis is recommended as a suitable procedure for incentive plan evaluation. Postevaluative actions are also discussed.