It is understandable that investors and proxy advisory firms continue to favor formulaic incentive plans driven by preset, quantitative goals for executives. These plans are transparent, have targets that typically align with budgets approved by the board, and the process allows for a straightforward evaluation of results. However, goal setting for incentive plans has become ever more challenging due to the increasing influence of macroeconomic, geopolitical, and public policy factors that are outside of the control of management teams. The economy and markets are not static, and extraneous events can change the trajectory of performance at any point within the cycle. Because of that, adopting a dynamic incentive plan that incorporates informed discretion can help ensure that outcomes are aligned with overall performance.

There are several ways that banks incorporate informed discretion within incentive plans. The impact of discretion can range from a plan based fully on informed discretion to a discretionary risk management modifier that is only used to reduce payouts when risk management concerns arise.

To read the full article, click here to be re-directed to the Bank Director website.