Short-Term Incentives: Top Down or Bottom Up?

Abstract

This article positions the short-term incentive plan in relation to the other four pay elements: salary, employee benefits, perquisites (executive benefits) and long-term incentives. Short-term incentives typically have a measurement period of 1 year or less; long-term incentives measurement periods are multiyear in nature. Top down plans begin with a determination of how much to pay in aggregate and then proceed to determine individual awards. These plans begin with a fund determined by a formula, judgment (discretion), or a combination of the two. Bottom-up plans typically begin with how much to pay for individual performance and then aggregate those awards to determine total payment.