Like it or not, money influences human behavior. Given that, executive pay, and in particular incentive compensation, is a powerful force for driving performance. People will do what you reward them to do. Thus, it is critical to invest time up front in designing the plan to fit your strategic goals and your desired culture.

Too often executive incentive plans are used as arbitrary year-end bonuses; Executives receive a January "thank you" check absent any prior discussion about desired organizational objectives. When goals are not clearly specified at the beginning of the performance period, rewards are viewed as deferred compensation payments; Discretionary year end bonuses may improve your cash flow but do little to motivate behaviors since bonus participants have at best only a vague idea what they are being rewarded for.

Yet, many companies like these programs because administration costs are minimal; unfortunately, so is the bang for your buck. What you've saved in plan development expense is lost in the marginal payback the organization receives. In some cases, the incentive plan becomes just an entitlement; an anticipated year-end payment. We have worked with more than one company where the entitlement mentality was so strong that executives actually expected to receive more money each January than they had the previous one. In even worse cases, you inadvertently create a plan that rewards the wrong goals and behaviors: sales unlinked to production; production without regard for quality; quality at the expense of competitive advantage, and so on.

In short, today's highly competitive business climate mandates greater creativity to assure plan effectiveness, "Plans that are clear, focused, and easily understood are much more impactful," says Aviva Sapers, principal at Sapers and Wallack.

The good news is that with a little more effort you can craft an executive incentive plan to achieve both your operating goals and the management behaviors your culture values. The key is to make sure annual goals clearly tie back to the strategic plan and the desired organization culture. In terms of strategy, chunk off objectives from the bigger target that can be accomplished within a year, such as, "Secure all regulatory and community approvals for the plan." Likewise, in terms of culture, craft goals that fit your organization: For example, if you value teamwork, do not emphasize individual projects. Many organizations shy away from using goals such as "improved morale," "customer satisfaction," "teamwork," or "leadership" because they incorrectly believe so-called "soft" objectives can not be measured. In fact, these kinds of goals are as important as more quantitative ones such as share or margin. There are many ways to measure "soft" goals: by observation, internal and external surveys, and feedback mechanisms such as 360 reviews. Failure to include qualitative goals in your incentive plan results in a narrow focus that ignores key dimensions of organization success.

In addition to being both quantitative and qualitative, goals at the executive level should be big, not mired down in detail. The executive's job is to figure out how goals are achieved; that's why you hired him. The CEO's job is to focus him on what is to be accomplished. The smart executive will then make sure his goals cascade down to his staff through individual and team objectives so that everyone is pulling in the same direction.

Similarly, you need to consider the timing of payouts: annual, mid- or long-term. While our topic here is primarily annual plans, in general you should consider the appropriate time horizon for each goal. Can it be achieved in a year? Do you want your team to focus beyond the year? Do you want long-term retention of key players? The answers determine the incentive plan's time frame. And whatever you do, do not mix short- and long-term goals in one plan. An annual plan, for example, should contain only goals achievable within the year. Otherwise, the executive's focus is whipsawed between multiple time horizons.

Limit the number of goals to no more than four or five. Many plans contain far more and dilute the plan's impact. Moreover, with goals to underscore their relative importance to the organization. For example, if a goal is worth only 5%, the likelihood is that the executive will aim for another, more valuable objective to the exclusion of the 5% one. In short, get the executive's attention with meaningful goals and meaningful payouts.

Other relevant design issues are too numerous to detail here but must be kept in mind: Should our plan have a "trigger," such as a minimum revenue or profit target, to activate it?; Should we use group objectives versus individual ones?; Shall we have uncapped or maximum payouts?; How do we handle unexpected events, "windfalls and caveins?"; How much pay should be at risk?; How about an escalator clause to reward exceptional business performance? When is phantom stock appropriate? Even this list is not exhaustive.

In conclusion, an incentive plan can be a powerful tool to help you get the operating results and behaviors you want from your executive team. Indeed, Steve , a shareholder of Tofias Fleishman Shapiro & Co. P.C. emphasizes that, "the purpose of executive compensation is not only to meet but exceed the organization's established goals, and to develop superior performance". To achieve these gains, you must invest up front in designing the plan. The right plan cannot be bought off the shelf, it must be created for your organization and your culture. Then it can work wonders.