Pearl Meyer recently laid out the fundamentals of a well-built short-term incentive plan — how to fund it, what to measure, how to shape the payout curve, and how to set goals that are actually credible.
As you will see, it’s a clean, disciplined piece of work. It’s also, like almost everything written about short-term incentives, aimed squarely at the executive plan: the bonus the C-suite earns, the one the compensation committee reviews line by line, the one that gets a funding mechanism and a calibration exercise and a communication strategy. Every principle in it is right. Our only quarrel is with the audience.
Here’s what we think this means for HR and Total Rewards leaders designing variable comp programs. The discipline Pearl Meyer describes — funding rigor, line-of-sight metrics, a real threshold-target-maximum structure, honest calibration, plain communication — is not executive-grade discipline. It’s just good bonus design. And the strange thing about most companies is that all of it stops at the top of the org chart. The executive plan gets architecture; the plan that covers the other 95% of the workforce gets a spreadsheet, a target percentage, and a year of hoping it works out. The employees in that broad plan are the ones whose behavior you most need the bonus to shape day to day — and they’re the ones whose plan got the least design. So before the next cycle locks, here are the principles we’d carry straight down the org chart.
1. Decide where the money comes from before you decide who gets it.
Pearl Meyer’s piece opens on funding, and that ordering is exactly right. A bonus plan needs a defined source — a fixed pool budgeted up front, a pool that funds as a percentage of company performance, or a trigger that has to clear before anything pays at all. In our experience, the broad employee plan almost never has this conversation. Targets get set role by role, the numbers get added up, and nobody asks whether the company can actually afford the sum if everyone performs. Then a strong year arrives, the math comes due, and finance claws the payout back by hand — which teaches the whole workforce that the plan isn’t real. Fund the plan first. A bonus the business can’t pay in a good year was never a plan; it was a wish with a formula attached.
2. Line-of-sight isn’t a nice-to-have. It’s the entire mechanism.
The piece is blunt that good metrics give participants line-of-sight — a visible path from what they do to what the plan measures. For an executive, almost any company-wide number clears that bar, because executives move company-wide numbers. Push the same metric down to a coordinator or a technician and the line-of-sight snaps. They can’t move enterprise EBITDA, so a bonus tied to it isn’t an incentive to them; it’s a lottery ticket that pays based on weather they don’t control. If you want the broad plan to change behavior, the metric has to sit close enough to the employee that effort and outcome are visibly connected. The further the number is from the person, the more your bonus is just deferred salary dressed up as performance pay.
3. A real payout curve belongs at every level, not just the C-suite.
Threshold, target, maximum — with a curve that scales payout to performance — is standard equipment in the executive plan and weirdly rare below it. Broad employee plans tend to collapse into a binary: you hit the number and get the bonus, or you don’t and you get nothing, or worse, everyone gets roughly target regardless. That structure does no motivational work. A threshold tells people the floor that has to clear before the plan engages. A maximum protects the business from runaway cost and protects the plan from looking arbitrary when results are extraordinary. The curve in between is where the actual incentive lives. If your employee plan only has one number, you’ve given people a pass/fail test, not a reason to push from good to great.
4. If the plan always pays at target, you don’t have targets — you have base pay on a delay.
Pearl Meyer makes the point that plans which consistently pay at or above target may signal weak calibration or a lack of rigor, and that’s the line we’d attach to every broad plan in the country. When the bonus lands at roughly 100% every single year, employees stop reading it as performance pay and start budgeting it as guaranteed income — which means it has quietly become salary, except now it’s salary you’ve attached the word “performance” to, setting up resentment the first year it doesn’t pay. Calibration is the unglamorous work that keeps a bonus honest: targets anchored to the real plan, a genuine spread of outcomes, a target that’s challenging rather than a foregone conclusion. If you can’t remember the last time your plan paid meaningfully below target, that’s not a sign the workforce is uniformly excellent. It’s a sign the targets aren’t doing anything.
5. At the employee level, discretion is a tax on trust.
The Pearl Meyer piece is careful about discretion — useful in extraordinary moments, corrosive when overused, because it erodes the perceived fairness of the program. For executives, who understand the plan as one input into a negotiated package, a discretionary adjustment is absorbable. For employees, discretion reads differently: it reads as the number changing for reasons they can’t see, decided by people they can’t question. Every time a broad-plan payout gets adjusted by judgment rather than formula, you teach the workforce that the rules aren’t the rules. The fix isn’t to ban judgment; it’s to build a plan strong enough that you rarely need it — to protect the outcome by design up front, not by intervention after the fact.
6. The plan only works if the employee can explain it back to you.
Pearl Meyer closes on communication, and notes that even an immaculately designed plan fails if participants don’t understand how it works. For the executive plan, “communication” is a board deck and a one-on-one. For the broad plan, it’s the difference between a bonus that drives behavior all year and one that’s a pleasant surprise in March. The test we’d apply is simple: can an employee, in their own words, tell you what they need to do to move their bonus, and roughly what it’ll pay if they do? If they can, the plan is doing its job between paydays. If they can’t — if the plan only becomes legible on the day the money lands — then it isn’t an incentive at all, no matter how elegant the design document is. It’s a year-end gift the formula happened to calculate.
Pearl Meyer wrote a clear set of rules for building a short-term incentive plan that works. We’d just refuse to file them under “executive compensation.” Funding discipline, line-of-sight, a real payout curve, honest calibration, restraint on discretion, and communication people can actually follow — none of that is a privilege the top of the house earns. It’s the baseline every employee under a bonus plan deserves, and it’s exactly the baseline most broad plans skip. The executive plan gets designed. The question worth sitting with is why the plan covering everyone else so rarely does.
If you’re looking for tools to simplify how you manage and administer bonuses — and to bring that same design discipline to your whole workforce, not just the top of it — let’s talk.