Sample Annual Incentive Plan Design Document

Sample_Documents

DISCLAIMER: This is a sample template provided for informational purposes only. It does not constitute legal, tax, or financial advice. Organizations should consult their own legal and tax advisors and tailor this document to reflect their specific business needs, geographies, and applicable laws.

Document Header

Field	Value
Document Title	Annual Incentive Plan Design Document
Document Type	Variable Compensation
Category	Annual Incentive Plan
Company	<Company Name>
Version	v<Number>
Effective Date	<Date>
Plan Year	<Fiscal Year> (e.g., FY<Year>)
Plan Owner	<Function> (e.g., Total Rewards, HR)
Prepared By	<Name, Title>, <Department>
Reviewed By	<Name, Title>, <Department>
Approvers	<Approver 1, Title>; <Approver 2, Title>; <Approver 3, Title>
Last Reviewed	<Date>
Next Scheduled Review	<Date>

Purpose and Objectives

• Define the design, governance, and administration of the <Company Name> Annual Incentive Plan (AIP) for the <Fiscal Year> plan year.
• Align employee rewards with company, business unit, and individual performance to drive value creation and reinforce the company’s strategy and values.
• Provide a consistent, equitable, and compliant framework for determining annual incentive awards across geographies and functions.
• Establish clear roles, responsibilities, and processes for goal setting, measurement, funding, and payout.

Scope and Applicability

In Scope

• All eligible employees of <Company Name> and participating subsidiaries within <Countries/Regions> who are designated for participation in the AIP.
• Plan design elements including eligibility, target award opportunities, performance measures, weightings, payout mechanics, and proration rules.
• Governance, approvals, communications, accounting, payroll operations, and compliance requirements associated with the AIP.

Out of Scope

• Long-term incentives (e.g., equity awards) and sales incentive compensation plans governed by separate plan documents.
• One-time recognition awards, spot bonuses, and ad hoc retention programs.
• Incentive programs mandated by local collective bargaining agreements where separate rules apply.

Applicability

• The AIP applies to eligible employees who are actively employed by <Company Name> on the last day of the plan year and on the payout date, unless specifically provided otherwise under the plan (e.g., retirement, death, disability, or as required by local law).
• Participation or continuation of participation is at the discretion of <Company Name> and does not create a contract of employment or guarantee of any payment.

Plan Overview

• The AIP is a short-term, cash-based variable compensation program designed to pay annually based on results achieved during the plan year.
• Plan Year: <Start Date> to <End Date> (typically the fiscal year). Currency: <Home Currency> unless local practice or law requires otherwise.
• Award Determinants: Corporate performance, business unit/function performance, and individual performance as defined in this document.
• Payout Timing: Targeted within <Number> weeks following plan year-end, after final results are approved by <Compensation Committee/Board> and subject to local payroll cycles.
• Administration: Managed by Total Rewards with partnership from HR, Finance, Legal, and Payroll.

Roles and Responsibilities

Role	Responsibilities
Board/Compensation Committee	Approves plan design, performance measures, goals, major adjustments, and final funding; exercises discretion as appropriate.
Chief Executive Officer	Reviews enterprise performance, recommends funding and adjustments to the Committee, and approves awards for executives except as reserved by the Committee.
Total Rewards (Plan Owner)	Designs plan, maintains documentation, coordinates goal-setting, models payouts, manages governance calendar, partners with HR, Finance, Legal, and Payroll.
Finance	Confirms metric definitions and results, validates goal calibration and currency rates, supports accruals and external reporting.
HR Business Partners	Socialize plan details, support eligibility reviews, coach managers on performance differentiation, coordinate communications.
Legal/Compliance	Reviews plan for legal and regulatory compliance, including clawback, tax, labor law, and country-specific requirements.
Payroll	Executes payments, applies tax withholding and deductions, ensures reporting and audit trail.
People Leaders	Cascade goals, provide performance assessments, recommend individual modifiers consistent with guidelines, communicate outcomes to employees.

Eligibility

General Eligibility Criteria

• Regular employees classified as <Full-time/Part-time> with standard work schedules of <Hours> per week.
• Employees in job grades <Range> or roles designated as eligible by <Function/HR>.
• Employees must be hired on or before <Date> and remain employed through the payout date to receive payment, unless otherwise expressly stated.

Ineligible Populations

• Temporary workers, interns, contractors, and consultants.
• Employees participating in a separate sales incentive plan for the plan year.
• Employees on a performance improvement plan (PIP) at the time of final award determination, unless an exception is approved by <Plan Owner>.

Special Cases

• Employees on approved leaves of absence may be eligible for prorated awards per local policy and law.
• Executive Officers subject to <Jurisdiction> clawback rules may be governed by additional provisions.

Target Award Opportunities

• Target award opportunities are expressed as a percentage of base salary earned during the plan year.
• Targets are set by job grade or role family to reflect market competitiveness and internal equity.

Job Level or Grade	Target Award as % of Base Salary	Threshold Payout (as % of Target)	Maximum Payout (as % of Target)
<Grade 1>	<Percentage> (e.g., 5%)	<Percentage> (e.g., 50%)	<Percentage> (e.g., 150%)
<Grade 2>	<Percentage> (e.g., 10%)	<Percentage>	<Percentage>
<Grade 3>	<Percentage> (e.g., 15%)	<Percentage>	<Percentage>
<Grade 4>	<Percentage> (e.g., 20%)	<Percentage>	<Percentage>
<Executive>	<Percentage> (e.g., 40%)	<Percentage>	<Percentage> (e.g., 200%)

Performance Measures and Weightings

Components and Weightings

• Performance is measured using the following components, with weights varying by population.

Performance Component	Standard Weighting (Non-Sales)	Standard Weighting (Leaders)	Example Metrics
Corporate Results	<Percentage> (e.g., 50%)	<Percentage> (e.g., 60%)	Revenue, EBITDA, Free Cash Flow, Safety
Business Unit/Function	<Percentage> (e.g., 30%)	<Percentage> (e.g., 25%)	Operating Income, Bookings, Quality, NPS
Individual/Role Objectives	<Percentage> (e.g., 20%)	<Percentage> (e.g., 15%)	KPIs, OKRs, Strategic Initiatives, DEI

Goal Setting Principles

• Goals are specific, measurable, achievable, relevant, and time-bound, aligned to strategy and within participants’ line of sight.
• Financial measures are anchored to the <Company Name> Board-approved annual operating plan.
• Goals include clearly defined threshold, target, and maximum performance levels.
• For non-financial metrics, define unambiguous scoring rubrics and data sources.

Payout Curves and Calibration

Performance Level	Achievement vs Goal	Payout Factor (as % of Target)
Below Threshold	<Less than X% of Target>	0%
Threshold	<X% of Target> (e.g., 90%)	<Percentage> (e.g., 50%)
Target	100% of Target	100%
Maximum	<Y% of Target> (e.g., 120% to 150%)	<Percentage> (e.g., 200%)

• Interpolation is linear between defined points unless specified otherwise.
• Overachievement beyond Maximum yields no additional payout.
• Floor and cap: The combined AIP payout is floored at 0% and capped at <Percentage> (e.g., 200%) of target.

Adjustments and Exclusions

• The following items may be excluded from performance calculations at the discretion of <Finance/Committee>: acquisitions, divestitures, discontinued operations, restructuring and impairment charges, changes in accounting standards, extraordinary items per <Policy Reference>.
• Currency impacts may be measured at constant currency using rates established by Finance on <Date>.

Funding and Payout Mechanics

Funding Algorithm

• The AIP funding pool is determined by multiplying each performance component’s payout factor by its weighting and summing the results.
• Individual awards are calculated as base salary earned during the plan year times target % times the composite payout factor, subject to modifiers and caps.

Example Calculation (Illustrative)

• Employee in <Grade 3> with base salary of <Amount> (e.g., 60,000), target award 15%.
• Corporate results payout factor: 120%. BU results payout factor: 90%. Individual results: 110%.
• Weightings: Corporate 50%, BU 30%, Individual 20%.
• Composite payout: (1.20 x 50%) + (0.90 x 30%) + (1.10 x 20%) = 0.60 + 0.27 + 0.22 = 1.09 or 109%.
• Target award: 60,000 x 15% = 9,000. Final award before caps: 9,000 x 109% = 9,810, subject to plan rules.

Individual Modifiers and Differentiation

• People leaders may apply performance differentiation within a range of <Percentage> to <Percentage> of the composite payout to reflect individual impact, provided ratings and documentation support the adjustment.
• Any award above <Percentage> of target requires approval from <VP HR/Total Rewards>; awards above <Percentage> of target require <CEO/Committee> approval.

Discretion and Governance Overrides

• The <Compensation Committee> may exercise positive or negative discretion to adjust funding or individual awards to ensure outcomes align with enterprise performance, risk management, and shareholder interests.
• Discretion may not be used to pay awards where prohibited by law or to circumvent minimum compliance standards.

Plan Year Cycle and Timeline

1. Q1 <Date Range>: Confirm plan design, eligibility, targets, and metric definitions; obtain <Leadership/Committee> approval.
2. Q1 <Date>: Communicate plan highlights and targets to managers and participants.
3. Q2 <Date Range>: Mid-year check-ins and forecast review; adjust goals if material changes occur, with approvals.
4. Q4 <Date Range>: Close plan year; Finance finalizes results and provides attestation.
5. Q1 (following year) <Date Range>: Total Rewards calculates preliminary funding; leaders review and recommend individual awards.
6. Q1 <Date>: <Committee> approves final results and awards; Payroll schedules payments.
7. Q1/Q2 <Date>: Distribute statements; managers communicate outcomes and next-year goals.

Employment Events and Proration Rules

New Hires and Rehires

• Hires on or before <Date> (e.g., October 1) are eligible for prorated awards based on base salary earned during the plan year.
• Hires after <Date> are not eligible for the current plan year unless an exception is approved by <Plan Owner>.

Promotions and Job Changes

• For mid-year promotions resulting in a higher target %, proration applies using time in each eligible role and corresponding target percentages unless otherwise approved.
• Changes in business unit assignment during the year result in prorated application of relevant BU metrics.

Leaves of Absence

• Paid leaves: Prorated based on base salary actually paid unless restricted by local law.
• Unpaid leaves: Prorated for time not actively employed, consistent with applicable laws.

Terminations

• Voluntary resignation or termination for cause before the payout date results in forfeiture of the award unless required otherwise by local law.
• Involuntary termination without cause may be eligible for prorated payment at the discretion of <HR/Legal> and consistent with separation agreements and local law.

Retirement, Death, Disability

• Retirement as defined by <Policy>: Participant may receive a prorated award at actual results, subject to approval.
• Death or disability: Beneficiary or participant may receive a prorated award, subject to local law and policy.

Event	Proration Basis	Eligibility Note
New Hire	Time in eligible status and base salary earned	Must be employed on payout date unless otherwise noted
Promotion	Time-weighted target % by role	Effective date of promotion determines proration split
Transfer BU	Time-weighted by BU and metric	Apply relevant BU payout factors per period
Paid LOA	Base salary actually paid	Local law may limit proration
Unpaid LOA	Time not actively employed	Excluded unless required by law
Retirement	Time in plan year	Subject to policy definition and approvals
Death/Disability	Time in plan year	Pay to beneficiary or participant per policy
Termination for Cause	N/A	Forfeit
Termination Without Cause	Time in plan year	Discretion per policy and law

Business Changes and Extraordinary Items

• Acquisitions and Divestitures: Goals and results may be adjusted to exclude pre-close or non-comparable periods; participants joining mid-year via acquisition may be placed on transition rules through <Date>.
• Restructuring, Impairments, and Unusual Items: Exclusions follow <Company Accounting Policy> and require <Finance/Committee> approval.
• Currency Treatment: Corporate and BU financials may be evaluated at constant currency using budget rates set on <Date>.
• Legal or Regulatory Constraints: Where local law conflicts with plan provisions, local law will prevail; document deviations in country addenda.

Data, Definitions, and Measurement Standards

Financial Metric Definitions

• Revenue: Net revenue from continuing operations as reported in <Company Name> consolidated financial statements, excluding <Items>.
• EBITDA: Earnings before interest, taxes, depreciation, and amortization, adjusted for approved exclusions.
• Free Cash Flow: Cash from operations minus capital expenditures as defined by Finance.
• Operating Income: Income from operations excluding <Items> per policy.

Non-Financial Metrics

• Safety: Total Recordable Incident Rate (TRIR) with threshold, target, maximum values.
• Customer: Net Promoter Score (NPS) versus baseline and target.
• Quality: First-pass yield or defect rate with defined measurement windows.
• People: Engagement index improvement and diversity hiring metrics with clear baselines.

Measurement and Assurance

• Finance validates financial results and provides signed attestation to Total Rewards.
• Non-financial data is sourced from system-of-records (e.g., <Vendor Name>, <System>), with audit trails.
• Internal Audit may review calculations and controls per annual plan.

Governance, Approvals, and Discretion

• Plan changes to eligibility, targets, and core metrics require approval by <Leadership Team> and <Compensation Committee> prior to the plan year start.
• Annual goals are approved no later than <Date> each year, with mid-year revisions only for material events and with required approvals.
• Final funding and award approvals are made by the <Compensation Committee> upon recommendation of the CEO and Plan Owner.
• The Committee may exercise discretion to align outcomes with risk, compliance, and stakeholder considerations.

Administration and Implementation Guidelines

Systems and Tools

• Plan administration will be supported by <Vendor Name> or internal tools for eligibility, calculations, and approvals.
• Integration: HRIS <System Name> for employee data; Finance <System> for results; Payroll <System> for payments.

Payroll and Accounting

• Awards are processed through regular payroll with applicable tax withholding and statutory deductions.
• Accounting accruals are estimated quarterly by Finance based on forecasted payout factors and eligible base salaries.
• Expense recognition follows <Accounting Standard> and internal policy.

Taxation and Withholding

Country	Withholding Approach	Employer Obligations
<Country>	Supplemental wage withholding per local rules	Employer social contributions and reporting as required
<Country>	Annualized tax calculation with year-end adjustment	File statutory reports by <Date>
<Country>	Flat bonus tax rate of <Percentage>	Remit within <Number> days of pay date

Compliance and Legal Considerations

• Awards are not earned or vested until approved and paid; <Company Name> reserves the right to amend or terminate the AIP at any time.
• Clawback: Awards may be recovered or reduced under <Company Clawback Policy>, securities exchange rules, and applicable law in <Country>.
• Anti-hedging and anti-pledging policies apply to executives as defined in <Policy>.
• Timing: Awards will be paid no later than <Date> following the close of the plan year to comply with applicable deferred compensation requirements.
• Data Privacy: Employee data will be processed in accordance with <Privacy Policy> and laws such as <GDPR/Local Law>.

Country Addenda

• Variations by country must be documented in addenda and approved by <Legal> and <Total Rewards> prior to implementation.
• Works council or employee representative consultations in <Country> will be completed by <Date> as required.

Risk Management and Controls

• Segregation of duties between data input, calculation, and approval.
• Control checkpoints include eligibility validation, results certification by Finance, exception approval logs, and payroll reconciliation.
• Maintain documentation for <Number> years for audit purposes.

Review and Approval Process

1. Total Rewards drafts plan updates and impact analysis by <Date>.
2. Finance validates metric feasibility and modeling by <Date>.
3. Legal reviews compliance and country variations by <Date>.
4. Leadership Team endorses proposed design by <Date>.
5. Compensation Committee approves final plan and goals by <Date>.
6. Plan document published and communications launched by <Date>.

Change Control and Versioning

Version	Date	Summary of Changes	Impacted Sections	Approved By
v<Number>	<Date>	Updated weightings for BU metrics	Performance Measures	<Approver>
v<Number>	<Date>	Revised proration rules for promotions	Employment Events	<Approver>
v<Number>	<Date>	Added clawback references for <Country>	Compliance	<Approver>

Worked Examples and Scenarios

Example 1: Proration with Promotion

• Employee promoted from <Grade 2> (10% target) to <Grade 3> (15% target) effective <Date>, with base salary changing from <Amount> to <Amount>.
• Time in Grade 2: 6 months. Time in Grade 3: 6 months.
• Calculate target opportunity separately for each period using base salary actually earned in each period, then apply the composite payout factor and sum. Approvals required for exceptions.

Example 2: BU Transfer Mid-Year

• Employee transfers from BU A to BU B on <Date>.
• Apply BU A payout factor to base pay earned while in BU A and BU B payout factor to base pay earned while in BU B. Corporate and Individual components apply to both periods per plan.

Example 3: Currency Treatment

• Employee is paid in <Local Currency>; corporate results measured in <Reporting Currency>.
• Award calculation uses base salary in <Local Currency> converted at payroll payment date; performance measured at constant currency set on <Date> per Finance policy.

Implementation Checklist

1. Validate eligibility list against HRIS and finalize by <Date>.
2. Confirm target % by grade/role and any approved exceptions.
3. Load goals and weightings into <Vendor Name/System>.
4. Publish manager and employee communications toolkit.
5. Establish Finance attestation and data handoff timeline.
6. Run calculation mock and payroll test cycle.
7. Finalize approvals, load awards to payroll, and reconcile post-pay.

Metrics Library (Illustrative)

Metric	Definition	Data Source	Frequency
Revenue	Net revenue from continuing operations	<Finance System>	Monthly/Annual
EBITDA	Earnings before interest, taxes, depreciation, amortization	<Finance System>	Monthly/Annual
Free Cash Flow	CFO definition per policy	<Finance System>	Quarterly/Annual
NPS	Promoter % minus Detractor %	<Customer Platform>	Quarterly
TRIR	Recordable incidents per 200,000 hours	<EHS System>	Monthly
Strategic KPIs	Initiative milestones with rubric	<PMO Tool>	Quarterly

Frequently Asked Design Questions (For Total Rewards)

How should targets be calibrated?

• Use market benchmarks at the 50th percentile for competitive practice, with differentiation by job family and geography where appropriate.
• Validate affordability using financial modeling across performance scenarios (e.g., 80%, 100%, 120% of plan).

What is the right mix of corporate, BU, and individual metrics?

• Increase corporate weighting for roles with enterprise impact; increase BU weighting for roles with direct line-of-sight to operational drivers; keep individual at a level that enables differentiation without undermining collaboration.

How is fairness ensured across geographies?

• Apply consistent principles while using country addenda for legal constraints. Maintain equivalence in opportunity and methodology; document any deviations.

When should discretion be applied?

• Use sparingly to correct misalignments caused by unanticipated events, compliance issues, or to uphold pay-for-performance integrity. Document rationale and approvals.

Legal Notices and Plan Disclaimer

• Participation is at the discretion of <Company Name>. The AIP may be amended, suspended, or terminated at any time, with or without notice, subject to applicable law and collective agreements.
• No entitlement to any award exists until approved and paid. The AIP does not alter the at-will employment relationship where applicable.
• Awards may be reduced, canceled, or recovered under the <Company Clawback Policy>, code of conduct, and applicable regulations.
• In the event of conflict between this document and local law, local law prevails. Country-specific deviations will be documented in addenda.

Glossary of Terms

• AIP: Annual Incentive Plan.
• Base Salary Earned: Total base pay earned during the plan year while in eligible status, excluding <Exclusions>.
• Threshold/Target/Maximum: Defined performance points corresponding to minimum, expected, and stretch outcomes.
• Payout Factor: Percentage applied to target award based on performance achievement.
• Weighting: Proportion of total award opportunity allocated to a performance component.
• Proration: Adjustment for partial-year eligibility or status changes.
• Discretion: Authorized adjustment by governance bodies to funding or awards.
• Clawback: Recovery or reduction of paid or unpaid awards under policy or law.
• Constant Currency: Evaluation method using fixed exchange rates defined at the start of the year.
• System of Record: Authoritative source for specific data (e.g., HRIS for employee data).

Employee Communication Summary

What the Annual Incentive Plan Is

The Annual Incentive Plan is a cash bonus program that rewards you for results achieved during the plan year. Your award is based on how <Company Name> performs as a whole, how your business unit or function performs, and how you deliver on your goals.

Who Is Eligible

If you are a regular <Full-time/Part-time> employee in an eligible role, you are likely included. Your manager or HR can confirm your eligibility. If you joined <Company Name> during the year, your award may be prorated based on the time you were eligible.

How Your Target Is Set

Each eligible role has a target award, shown as a percentage of your base salary. For example, a role may have a 10% target. This target is not a guarantee; your actual payout can be lower or higher depending on results.

How Performance Translates to Payout

Your award is determined by three components:

• Corporate results that reflect how <Company Name> performed overall
• Business unit or function results that reflect your team’s performance
• Your individual results based on goals set with your manager

Each component has a weight. When results are finalized, we calculate a payout factor for each component and combine them. If overall performance is at target, the payout factor is 100%. If results are below threshold, there may be no payout. If results exceed goals, payouts can be above target, up to a maximum.

An Example

If your base salary is <Amount> and your target is <Percentage>, your target award is your base salary times that percentage. If the combined payout factor is 110%, your final award is your target award times 110%. This is an example only. Actual results vary.

When Awards Are Paid

Awards are typically paid in <Month> after the plan year ends, following approval by <Leadership/Committee>. You must usually be employed on the payout date to receive payment, unless local law or specific policy says otherwise.

What Happens If You Change Roles or Take Leave

If you change roles, transfer between business units, or take a leave, your award may be prorated to reflect those changes. Your manager and HR will explain how the rules apply to you.

Taxes and Withholding

Awards are subject to taxes and required deductions. Your local payroll team applies the correct withholding when your award is paid.

Important Notes

The plan can be changed or ended by <Company Name> at any time as allowed by law. An award is not guaranteed until it is approved and paid. Misconduct or violation of policy may reduce or cancel an award, and certain awards may be subject to recovery under our clawback policy.

Where to Go for Help

If you have questions, talk to your manager or HR representative, or visit <Intranet Link> for plan details. You can also email <HR Contact Email>.

Contact Information

• Plan Owner: <Name, Title> at <Email>
• Total Rewards: <Distribution List>
• Payroll: <Payroll Contact>
• Legal/Compliance: <Contact>

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Document Information:

• Document Type: Annual Incentive Plan Design Document
• Category: Variable Compensation
• Generated: August 24, 2025
• Status: Sample Template
• Next Review: <Insert Review Date>

Usage Instructions:

1. Replace all text in angle brackets < > with your company-specific information
2. Review all sections for applicability to your organization
3. Customize content to reflect your company's policies and local regulations
4. Have legal and HR leadership review before implementation
5. Update document header with your company's version control information
6. At bottom of the document you find a short example on how the content could be communicated to end-users, for instance employees.

This sample document is provided for reference only and should be customized to meet your organization's specific needs and local legal requirements.