1. Plan Concept and Objective
Developing a clear statement of the objective of the plan is critical and yet is probably the most difficult task.  Usually, the most practical approach is to address questions such as:

• What types and levels of personnel should the plan cover?
• Should the plan reward corporate, division or individual performance or a combination?
• Is the plan primarily for the purpose of rewarding increased performance or attracting new personnel (in which case it may be necessary to "replace" benefits lost by an employee leaving a prior employer)?
• Is a purpose of the plan to provide "golden handcuffs"?

2. Importance of Forecasting
Certain incentive plans require essentially no forecasting while others require accurate forecasting.  While many companies find the goal setting and performance measurement activity one of the key advantages of having an incentive plan, it is important to select an incentive plan which is consistent with the company's forecasting needs and abilities.  The two most frequent problems in this area are:

Low Level Targets: Management frequently expresses an interest in defining incentive targets by department or even by individual.   ECI favors this approach where possible, since such goals are more likely to be within the "control" of the participants.  Unfortunately, we rarely find companies with sufficient confidence in department or individual forecasting/target setting to base incentives solely on this criteria.  More typically, such low level targets are used to "adjust" incentives based on division or corporate performance. 

Long Term Targets: Management often expresses an interest in basing awards on long term (two to five years) performance but many have difficulty establishing accurate targets over this period. 

3. Ease of Communication
For an incentive plan to be effective, it must be understood by the participants.  Many incentive plans are very simple and straightforward, and are easily communicated.  Others are so complicated that it is very difficult for managers to understand them, or to "track" their progress and their potential incentive payments.

4. Comprehensiveness
Many "cash" incentive plans base the incentive pool on corporate net profits only.  Frequently, it may be appropriate for an incentive plan to consider other objectives, such as division profitability, revenue growth, productivity, or other factors.  As a minimum, there should be a determination as to whether performance measures other than net profit would be considered. 

5. Discrimination
Many incentive plans have built in the ability to discriminate in payments between employees who are superior performers and employees who are sub-standard performers over the term of the plan.  In other types of plans (particularly stock based and "profit sharing" plans). the relative performance of individual executives over the term of the plan is not recognized. 

6. Integration with Total Compensation Program
Management should consider what effect the incentive plan may have on total direct compensation costs (e.g., whether salary increases should be lessened for bonus eligible positions).  In addition, incentive payments will need to be taken into account with respect to benefit programs typically based on W-2 compensation, such as pension, profit sharing, life insurance, long-term disability, and other programs. 

Ideally, these factors would be addressed first and resolved.   In practice, the development of an incentive plan often involves an iterative process of forming a plan concept, examining and testing alternatives, and refining the plan concept further.