Beyond the Bell Curve: Incentive Payout Design
In the quest for “just right” outcomes, compensation committees may be tempted to engineer a tidy bell curve in incentive payouts. But here’s the reality: a normal distribution might not be right for your company's strategy.
A recent WTW analysis of CEO annual incentive payouts over the past decade sheds light on how payouts stack up against probability-based goal-setting assumptions.
Spoiler alert: many companies already naturally align to a bell curve. WTW analyzed how often companies hit their payouts over a 10-year period.
Threshold: Achieved 90–95% of the time
Target: Achieved 55% of the time
Maximum: Achieved 6–20% of the time
This tracks closely with the standard probability model often used in incentive design:
Threshold: ~80–90% probability
Target: ~50–60%
Maximum: ~10–20%
So, if your payout history already resembles a bell curve, mission accomplished, right?
Not so fast. The real question isn’t whether your payout curve is symmetrical, it’s whether it reflects your company’s strategic intent.
Ask yourself: Does your company value predictable, stable payouts or is it built for high-risk, high-reward variability? Here’s how to test whether your payouts match your philosophy:
Historical patterns: How often have you hit threshold, target, and max over the last decade? Is there enough stretch in your goals or are they too ambitious?
Forecasting accuracy: How good is your organization at predicting performance?
External factors: Are results driven more by macroeconomic shifts than company performance?
One Example, Two Strategies. Consider a hypothetical company with ESP growth targets and a steeper slope that rewards outperformance more than it penalizes underperformance. For this company, threshold was achieved 6 times, target 5 times and maximum 4 times over 10 years. This suggests a risk-tolerant strategy: ambitious goals and a willingness to accept wide swings in reward. However, this approach would not work with a company that values stability in the payout range.
The Bottom Line. Whether your company is a high-growth disruptor or a steady industry incumbent, your pay philosophy should drive your curve, not the other way around.
Megan Wolf
Director, Practice, HR Policy Association and Center On Executive Compensation
MORE NEWS STORIES
In Defense of the Buyback: Why Share Repurchases May Be a Smart Move
Farient on PSUs: “May Not Be Optimal”
