Understanding Variable Compensation Funding
Plan funding sets a cap on payouts under the plan. If funding falls short of the calculated payout, the Calculate Awards process calculates and applies an adjustment factor to awards that are above the minimum. The system tracks and updates your funding balances as you grant awards on the Allocate Awards page.
To fund a variable compensation plan:
Select Funded Plan on the Plan Business Rules page when you set up the plan.
Run the Budget report to determine the expected total cash outlay under the plan (optional).
Fund the VC Plan using the Plan Funding page.
Fund the plan at any time during the life of the plan.
Distribute funds to groups in the plan using the Allocate Group Funding page (for plans that use groups).
Allocate funds to groups at the end of the payout period, when goal attainments and proration are known.
See Understanding Group Funding Allocation.
The Adjustment Factor
The Calculate Awards process calculates and applies an adjustment factor when the calculated awards exceed the funding for the plan. The purpose of the adjustment factor is to adjust each individual award in the same ratio to the calculated award as the ratio of group or plan funding to the total value of calculated awards for the group or plan. For example, if the funding for the group or plan is 10 percent less than the total calculated awards for the group or plan, the adjustment factor would reduce the individual's calculated award by 10 percent.
The process applies the adjustment factor to the adjustable portion of each individual's award. The adjustable portion of an award is the calculated award amount minus the minimum payout amount that you (optionally) established for the group or plan. The system subtracts the minimum award value when calculating and applying the adjustment factor because the minimum is not considered adjustable.
This image displays a formula that the system uses to calculate the adjustment factor.
In other words, the formula is the actual funded amount for each group or plan less the sum of the minimum awards for that group or plan divided by the sum of the adjustable portions of all individual awards.
The Calculate Awards process applies the adjustment factor to the calculated award and enters the result in the Adjusted Award field on the Allocate Awards page.