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April 17, 2010
Compensation 101: Short-Term and Long-Term Incentives

When formulating short and long-term incentive plans, it is important to recognize the pros and cons of each and find the appropriate balance. It is also important to be sure that incentives are tied to something that is within the employee's influence or control. In a BLR webinar titled "Compensation 101: Essential Secrets and Strategies for HR Professionals," Paul R. Dorf outlined the characteristics of short-term and long-term incentive plans.

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Short-Term Incentives:

  • Formula-driven awards based on employee’s contributions to company’s performance
  • Cover a period of up to one year (This aligns with the idea of only holding people accountable for that which they have the ability to impact or control.)
  • "At-risk" nature provides motivation
  • Provided to positions that can substantially affect performance outcomes

Long-Term Incentives

  • Inducements to influence longer-term results (>1 year)
  • Generally geared to management and project teams
  • In some cases, long term incentives are predominantly paid in stock; private companies use cash to mimic stock

The key is to have a combination of short and long term variable compensation to balance the motivation and focus of the employees appropriately.

Paul Dorf is the Managing Director of Compensation Resources, Inc. (CRI). CRI (www.compensationresources.com) specializes in providing comprehensive Compensation and Human Resource consulting services. Dorf is responsible for directing consulting services in all areas of executive compensation, short and long term incentives, sales compensation, performance management programs, and salary admin programs.

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