NFP Compensation Consulting — the firm that used to be Longnecker — lays out a clear philosophy for building an annual incentive plan: ROI should be the driving factor.
The design of any incentive plan, they argue, should start from the level of return the company decides the plan ought to generate and from how much the company is willing to invest to get that return, with the plan’s funding tied to quantitative objectives that move as the business grows. You can read NFP Compensation Consulting’s annual incentive plan approach here.
It’s a disciplined way to think, and it fixes the most common funding mistake we see in private-company bonus plans — the one where targets get added up role by role and nobody checks whether the company can actually afford the total. Start from ROI and that mistake disappears. We’d just add that ROI answers one of the two questions a bonus plan has to answer, and it’s not the one the employee is asking.
Here’s what we think this means for HR and Total Rewards leaders designing variable comp programs. ROI is the company’s question: what do we get back for what we spend? It’s the right question for the CFO, the right question for the funding conversation, and the right question for deciding whether the plan should exist at all.
But there’s a second question sitting underneath it, and it belongs to the person the plan is supposed to motivate: what do I have to do to earn this, and can I see the path? A plan can score beautifully on the first question and fail completely on the second. In our experience, the bonus plans that quietly do nothing aren’t the underfunded ones — they’re the ones that were designed entirely from the company’s side of the table and never tested from the employee’s. So here’s how we’d hold both questions at once.
1. Fund the plan by ROI. Design the plan by line of sight.
These are two different jobs, and the trouble starts when a plan does the first and skips the second. ROI tells you how big the pool should be and what has to be true for it to pay. Line of sight tells you whether the people in the plan can connect their daily work to the thing being measured. You need both, in that order, and you need to know which one you’re working on. A plan funded off company-wide return, then handed down to a coordinator whose job touches none of the levers that move that return, is fully rational on paper and inert in practice. The funding logic is sound; the behavioral logic was never built. Decide what the company will spend and why — then ask, separately, whether anyone below the leadership team can actually chase it.
2. The company’s return and the employee’s return are different calculations.
When NFP frames ROI as the design driver, the “I” is the company’s investment and the “R” is the company’s return. The employee runs their own version of that math, whether or not anyone hands them the inputs. Their investment is discretionary effort — the extra push that isn’t in the job description. Their return is what the bonus pays for that push, discounted by how likely they think it is to actually pay. If that perceived return is low or murky, they rationally hold the effort back, and the company’s ROI quietly erodes from the bottom. The two calculations have to point the same direction. A plan that’s a good investment for the company but a bad bet from the employee’s seat will underperform its own funding model, because the behavior it was built to buy never shows up.
3. An ROI-perfect plan nobody understands is a cost, not an investment.
The most efficient-looking plans we see are sometimes the least effective. Every dollar is tied to a quantitative objective, the funding flexes with growth, the math is airtight — and the average participant could not tell you what they need to do to move their own number. At that point the bonus isn’t buying behavior; it’s just a variable-pay expense the company happens to incur in good years. The return the ROI model assumes depends on people responding to the plan, and people only respond to a plan they can read. If the design is so optimized that it’s only legible to the people who built it, the company is paying for an incentive and receiving a disbursement. Comprehensibility isn’t a communications afterthought. It’s part of whether the ROI is real.
4. Use the non-financial measures NFP names — but use them on the plan, not just the people.
To their credit, NFP is explicit that financial ROI isn’t the only way to measure an incentive plan’s value, and points to tools like employee attitude and customer satisfaction surveys. We’d take that further. Those measures aren’t just outputs to track; they’re diagnostics for whether the plan itself is working as an incentive. If you survey the workforce and people can’t explain how their bonus is earned, that’s not a low engagement score to manage — it’s direct evidence that the plan is failing the line-of-sight test, no matter what the financial ROI says. Ask the questions that test the mechanism: Do you know what moves your bonus? Do you believe effort changes the outcome? A plan can post a strong financial return for a year or two while those answers rot, and the rot shows up later as turnover the ROI model never priced in.
5. Quantitative objectives are necessary. They are not the same as motivating objectives.
NFP is right that funding should rest on quantitative objectives that change as the business grows — vague plans are ungovernable, and a number you can’t audit is a number you’ll eventually argue about. But “quantitative” and “motivating” are not synonyms. A metric can be perfectly measurable and still sit so far from the employee that it carries no behavioral signal. Enterprise return is precise and, for most of the workforce, unreachable. The discipline we’d add to the ROI frame is a second screen on every metric: not just can we measure this and does it protect our return, but can the person being paid on it actually influence it. Keep the rigor. Add the reachability test. A measurable goal nobody can move is a reporting line, not an incentive.
NFP Compensation Consulting is right that ROI belongs at the front of the design conversation — it’s the question that keeps a bonus plan financially honest, and skipping it is how private companies end up owing money they didn’t budget. We’d just refuse to let it be the only question at the table. The company’s return and the employee’s return are two different sums, and a plan only delivers the first when it credibly delivers the second. Fund by ROI. Then design as if the person earning the bonus gets a vote — because, through the effort they choose to give or withhold, they always do.
If you’re looking for tools to simplify how you manage and administer bonuses — and to make sure the plan you funded is one your whole workforce can actually see and chase — let’s talk.