The role of the finance function has changed dramatically over the past couple of decades, and it continues to evolve. Traditionally, the primary responsibilities of finance included financial reporting, cash flow management, and activities around securing corporate funding. Increasingly, though, finance leaders are being asked to play a more strategic leadership role in their organization.

One area in which leaders of the finance function can be particularly instrumental in reinforcing corporate strategy is in the design of companywide incentive compensation. Finance can help with the selection of performance measures, the evaluation of possible performance targets, and an assessment of the cost and affordability of alternative compensation-program designs. Getting an analytical finance manager's perspective is especially important for companies evaluating long-term incentive plans, with which the range of alternative designs is virtually limitless—and the selection is high-risk.

In many companies, decisions about incentive pay continue to be made by a combination of human resources and the compensation committee of the board of directors. These decision-makers simply hand their plans to finance for execution. The problem is that with so many different design levers in play, it is easy to inadvertently set performance targets that are either unrealistic or overly lax. The end result of that mistake is disengagement and skepticism among recipients of the incentive program.

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