We were discussing how a base salary covered meeting the budget sales and profitability targets. Then bonus targets were set above the budget targets.
The bonus would be awarded on a pro rata basis depending on how much progress had been made on meeting the bonus targets.
Get half way to meeting the bonus targets after reaching the budget targets, and the executive gets half the bonus.
There was some doubt about the structure because the bonus targets couldn’t be reached with 100% certainty.
And that’s how it’s meant to be.
If achieving the bonus targets was 100% certain, then the budget targets have been set too low.
The idea of bonus targets is to create a “stretch” objective, which will require going the extra mile and thinking outside the box to achieve.
Bonus targets that are too easy to reach, mean that the bonus or “at risk” components of the compensation package are in fact components of the base salary package in disguise.
“At risk” components of an executive compensation package should really be “at risk.”