Total Pay Management
Total Performance Management
Total Talent Management
Case Studies


Case Studies #01 | Performance Management
Case Studies #02 | Economic Profit Incentives
Case Studies #03
| Share-Based Compensation

Economic Profit Incentives for Unlisted Security Services Provider

The compensation system of the company was that of a traditional annual year-end bonus system without any long-term performance component. The bonus system was funded through accounting accruals without strong linkage to company results and shareholder value creation.

Carrots was approached to develop and implement a short as well as long-term incentive program to enable the company to reward based on a strong pay-for-performance philosophy.

As the company is not publicly listed and future plans for an IPO unknown, share-based incentives and employee stock options are not to be considered. Hence, the challenge arises to develop a unique performance cash-based long-term incentive program for the company.

Carrots Solution
Carrots recommended a two tier incentive approach:

(a) Target-based short-term incentive based on corporate and individual performance scorecard achievements

(b) Economic Profit (EP) incentive program as the medium to long-term incentive using an incentive banking approach.

The EP incentive plan works on the concept of sharing the residual profit over and above the cost of capital with participants. Senior management have their share of the residual profits allocated individually into incentive banks from which annual payouts are made with the balance rolling forward to future performance periods. This results in a multiple year incentive approach and encourages employees to focus on longer-term business objectives. This serves as an effective motivational system as significant upside can be achieved from superior performance. An incentive banking mechanism also provides staggered payouts for retentional purposes.

The EP incentive plan has enabled the company to enhance their total compensation competitiveness whilst at the same time ensuring strong alignment with shareholder value creation. With an attractive total compensation plan in place, the company is now able to employ the best talents and retain their senior management employees. A steady growth in economic profit has been realized to date.