Big Red Car here on a decidedly drippy and wet Saturday morning.  Ugh.  Haha, Big Red Car, get your mind right, you say.  This is late May when we get our beloved rains and our lakes fill up.

Alas, the Big Red Car is a very, very, very self-centered Big Red Car and thinks only about those handful of days in which he cannot run wild with his top down and his hair on fire.  Ahhh, it is great to be a Big Red Car.

So now we turn to one of the important concerns of the C Level Employment Agreement, the issue of short term incentive compensation.  You can see the logical progress of the discussion of compensation related terms here:

The C LEVEL EMPLOYMENT AGREEMENT Series.

You can read this at your leisure and track our progress through salary, benefits, short term incentive compensation, long term incentive compensation and something special.

Remember that well designed compensation programs ensure longevity, motivation and achievement.  A very smart Board of Directors sweats these details in the creation of the original Employment Agreement and reaps the benefits thereafter for many years.

Short Term Incentive Compensation

Short term incentive compensation is the locus at which the Vision, Mission, Strategy, Tactics, Objectives — OBJECTIVES, OBJECTIVES, OBJECTIVES, Values and Culture are all tied together.

Short term incentive compensation is based on the attainment of short term objectives as enumerated in the company’s tactical plan, its business plan.

It also ties together the Employment Agreement, the job description, objectives and performance appraisal.

Objectives

The objectives themselves should be enumerated in both the company’s tactical plan or business plan but also an annual addendum to the C level employee’s Employment Agreement.  This goal setting exercise is essential to setting the framework for earning the short term incentive compensation.

The objectives themselves must be SMART:

1.  Specific;

2.  Measurable;

3.  Attainable;

4.  Realistic; and,

4.  Time constrained.

An example of a SMART objective might be the following:

During CY 2013, the CEO will oversee the creation and rollout of a social media footprint for each of the 50 operating units including standing up websites, Facebook pages, Twitter accounts, Pinterest boards together with an email marketing and text messaging campaign.  This will be done using organic resources.

There is nothing unique about this particular offering.  Write your objectives as they suit you and are understood by all parties — but DO write them.

A good Employment Agreement and job description likely has ten important objectives for any calendar year.  They should written and ready to go on or about 1 November of the preceding year.

Performance appraisal

The attainment of objectives — and thus the issue of short term incentive compensation — should be measured in the context of performance appraisal.

Most small companies do a horrible job of setting objectives, measuring their attainment and using them to drive short term incentive compensation.  That is to simply say that most Boards of Directors simply do not manage their CEOs effectively.

I say that just to ensure that you do not think the Big Red Car is operating in some Never Never Land wherein the Big Red Car thinks that most companies are doing this.  The Big Red Car gets it that most companies are NOT doing it this way and therefore the Big Red Car wants those companies to consider getting with the program.  For Boards of Directors this is an admonishment — get your shit together.  Now.

Attainment

Short term incentive compensation should be awarded in exact conformance to the level of attainment of objectives.  Boards can take a “T Ball” measurement standard if they want or they can simply take a binary approach.

T Ball standards make everyone feel good — ahhh, everybody gets a hit, nobody is ever out, everybody scores, nobody wins or loses because no score is kept, everybody gets a big trophy, everybody is an MVP and then we go out for ice cream.  Wheeeee!

A binary approach simply says “0” or “1” — the objective was either accomplished or it was not.  No “bad hops”, Middle Eastern wars, rain delays, acts of God or other explanations.  It was either accomplished or it was not.

When you have multiple data points — like our 50 operating units objective above  — feel free to make a percentage evaluation of the attainment or accomplishment of objectives.  Be fair but be precise.

Compensation delivered

The short term compensation should be paid in the form of cash and should be up to 33% of a year’s salary.  So if the CEO is making $300,000 then short term incentive compensation should top out at $100,000.

This is a simple guideline, use it as a guide for your particular situation.

Important rules

1.  Do not delay in the administration of this program.  Get it done.

2.  Write the next calendar year objectives in November of the preceding year.  Get them agreed to by all parties no later than 1 December and sign off on them immediately.

3.  Discuss, review, update and evaluate objective attainment with the CEO at least quarterly.  Have them in every Board package regardless of the frequency with which the Board meets.  Do not let the objectives to become dead and stale.

4.  Conduct your performance appraisal within a week of the end of the calendar year.  As soon as you have preliminary Q4 numbers.  [This will very easy as you just got done creating next year’s objectives so you know whether last year’s objectives were attained or not.  It all ties together as a continuum.]

5.  Conduct the performance appraisal as quickly as possible — that means you, Board Compensation Committee.  Do it in writing.

6.  Ask the CEO for his assessment of objective attainment.  You will be surprised to find that the CEO is a pretty hard grader.  Good CEOs are.  If there is a huge gap, discuss it and allow for an alternative or dissenting opinion.

7.  Present the performance appraisal to the Independent Directors of the Board — via email is fine — and discuss it and conclude it.  By the second week of January.

8.  Present it to the CEO with a check attached for the short term incentive compensation.  Do not dawdle in making payment.  Do it and move on.

9.  If the CEO has done a great job, create a bit of a celebration.  Celebrating the moments of success makes it a habit.  Success is a good habit to have.

This is a very simple process but it takes a bit of administration.  You can do it.

But, hey, what the Hell do I know anyway?  I’m just a Big Red Car.