Energy transition, regulatory pressures, technological advancements and an increased focus on sustainability have reshaped how North American utilities operate and compete. A critical element of this transformation has been in short-term incentive (STI) plans, which are designed to align workforce performance with rapidly changing organizational goals.
In this article, we explore the purpose and design of these incentive plans as well as their strategic implications in the utility industry.
STI plans attract, retain and motivate a performance-oriented workforce that can receive tangible financial incentives. These incentives come in the form of at-risk, performance-based compensation to improve productivity, efficiency and other desirable goals (e.g., reliability, safety, customer satisfaction, environmental compliance) that management deems as important to running a successful business. STI plans send powerful messages to employees because their compensation is contingent on these important customer-oriented goals.
STI plans are time-tested and generally successful ways to increase productivity, efficiency and employee performance while reducing the costs and inefficiencies of employee turnover. In addition, employees expect to participate in such plans because they are widely prevalent; the absence of STI plans would make a utility less competitive from a talent attraction and retention perspective.
Based on market data from WTW’s 2025 Energy Services and General Industry Compensation Surveys, STI plans are a nearly universal practice among for-profit organizations and a commonly found practice among not-for-profit organizations (Figure 1).
Given the high prevalence of these plans in the market, it is important for utilities to prioritize designing a market-competitive STI plan that offers competitive target award opportunities. This will support utilities’ efforts to compete for the highly skilled and experienced talent needed to successfully run the company.
Among utilities, the current approach to designing STI plans generally involves a balanced scorecard of both financial and non-financial (e.g., operational, strategic) performance measures.
Based on WTW’s analyses of the past 10 years (based on 2015 and 2025 proxy statements that largely reflect fiscal years 2014 and 2024 data) of the top 25 investor-owned utilities in the U.S., the most common financial measure is EPS. Common non-financial measures include safety, customer satisfaction, reliability, operational performance and environmentally focused measures.
First, financial measures ensure a focus on the utility’s sound financial management with an emphasis on profitability. In turn, this profitability drives investment in infrastructure and services to customers as well as aligns with shareholder expectations (Figure 2).
Second, non-financial measures ensure utilities provide safe, reliable, sustainable and cost-effective service to customers (Figure 3).
There is an interdependence of a utility’s financial performance with its operational/service-related success. Strong financial performance enables a utility to invest in resources, both physical and people, which ensures the efficient and effective operation of the company — and benefits customers.
The utility balanced scorecard design varies from broader general industry, where STI plan designs consist of fewer measures and a heavier emphasis on financial measures. In 2025, we found that the top 25 investor-owned utilities in the U.S. typically include four to 15 performance measures in their plans (72% prevalence), with financial/non-financial measure weightings of about 70% / 30%.
Conversely, for-profit general industry companies typically include two to five measures (75% prevalence) with a heavier focus on financial measures like operating income, revenue and cash flow. Figure 4 provides a summary of the number of STI plan measures in both the utility and general industries.
Given the need to emphasize measures that align with strategic priorities and maintain balance for their various stakeholders (e.g., customers, communities, employees, shareholders), utilities include more performance measures in their STI plans than general industry companies.
Utilities have shifted their performance measure weightings in the past 10 years, placing a heavier weighting on non-financial measures in their STI plans.
Figure 5 shows the median performance measure weightings of a constant sample of 22 investor-owned utilities from 2015 through 2025. In 2015, the median measure weightings were closer to 80% financial/20% non-financial. In comparison, 2025 median measure weightings were 70% financial/30% non-financial, a 10% increase in the weightings of non-financial measures.
When comparing the analysis of STI plan designs conducted in 2015 to the analysis conducted in 2025, the non-financial measures that have become more prevalent include customer satisfaction (+40% prevalence), environmental impact (+37%) and reliability (+16%). These changes reflect utilities’ increased focus and emphasis on serving their customers and environmental sustainability.
The balanced scorecard STI plan designs used by utilities, unlike general industry STI plans that are heavily tied to financial outcomes, emphasize focus on all stakeholder groups including customers, communities, employees and shareholders.
Because they are so common in both the utility and broader general industries, utilities must provide competitive STI plans and target award opportunities, as they are an essential part of a market-competitive pay mix. To attract, retain and engage critical talent needed to ensure the company provides safe and reliable service to its customers, utilities need to maintain market-competitive compensation programs inclusive of at-risk STI plans.
As Figure 6 shows, the utility industry has lower voluntary turnover across all employee levels compared to the broader general industry. Offering market-competitive compensation as well as other factors like job security and benefits are key reasons for the lower utility industry turnover rate.
| Market median | ||||||
|---|---|---|---|---|---|---|
| Voluntary turnover | All employees | Executive | Supervisory/ management | Professional | Support staff | Production/ manual labor |
| Utilities industry | 6.2% | 1.0% | 3.3% | 5.3% | 4.3% | 4.4% |
| General industry | 9.3% | 4.0% | 4.9% | 7.0% | 9.8% | 10.4% |
The importance of providing market-competitive pay, including STI plans, is reinforced by the energy and utilities findings from the WTW 2024 Global Benefits Attitudes Survey. These results showed that pay and bonus are the top drivers of employee attraction and retention in the energy and utilities sector.
A misaligned STI plan can lead to various risks that ultimately hinder an organization’s success. When employees focus on meeting performance goals that don’t align with the company’s strategic goals, it may promote unintended behaviors and a short-term outlook that compromises long-term growth and innovation.
This misalignment can result in decreased morale and engagement, as employees may perceive the plan as unfair or not reflective of their contributions (e.g., poor line of sight). Additionally, misaligned plans can lead to attraction and retention concerns, further increasing costs related to higher turnover and recruiting.
In recent years, public service commissions in certain U.S. states have broken from past precedent and have allowed rate recovery of incentive compensation based on a review of the facts and circumtances of the rate cases.
In case No. 15-0675-S-42T (Feb. 24, 2016), the Public Service Commission acknowledged in a rate case that “(Annual performance plans) that tie some portion of an employee’s compensation to an employee’s actual performance are prevalent in the compensation packages for larger businesses and (have) become the norm for major utility companies.”
The commission further agreed that “the (annual performance plan) is an integral part of the overall compensation plan and that the total compensation (the combination of base pay and incentive pay) to eligible employees is intended to place that total compensation at or near the market rate for each particular job or salary band.
In 2022, the commission explicitly allowed full recovery of long-term incentives. “We will allow the total LTPP in revenue requirements. The commission realizes that this is a departure from our decision in the Appalachian Power case cited by staff. We are persuaded by the argument that all of the shareholders participating in the program are employees and that all expenditures ultimately and indirectly benefit shareholders. It is not reasonable to pick one expense and arbitrarily eliminate it or reduce it by 50% because it indirectly benefits shareholders.”
Section 104.060 of the Gas Utility Regulatory Act (GURA) was enacted in 2019 to establish a specific framework that regulatory authorities must use to evaluate the reasonableness and necessity of employee compensation and benefits expenses in a gas utility rate case.
The plain text of Section 104.060 provides that the regulatory authority “shall presume that employee compensation and benefits expenses are reasonable and necessary if the expenses are consistent with market compensation studies issued not earlier than three years before the initiation of the proceeding to establish the rates.”
In “employee compensation and benefits,” the section includes base salaries, wages, incentive compensation and benefits. There are certain items not included in the definition of compensation and benefits, but overall total compensation (base salary, STI and LTI) at a utility for the majority of employees is recoverable provided it is competitively reasonable and consistent with peers, as determined through recent market studies.
As utilities continue growing and evolving as part of the energy transition, they should keep an eye on the following when thinking about their STI plans:
The evolution of STI plans in the utilities sector reflects broader industry trends toward innovation, sustainability and customer-centricity. As utilities continue navigating the challenges of the modern era, STI plans will play a pivotal role in attracting and retaining talent, driving performance and aligning employee efforts with critical business objectives. Utilities should ensure that their STI plans continue to meet the primary objectives of their various stakeholders.
