What is a Carve-out?
A 'carve-out' is a type of corporate reorganisation in which a firm establishes a sister concern and makes it public while maintaining control. So that the parent business retains an equity stake in the subsidiary, around 20% of the shares are made public.
This type of subsidiary formation benefits the parent company since it permits the subsidiary's market worth to be established based on the parent firm's credibility.
In the medical field, the term "carve-out" has a different connotation. It refers to making additional provisions for a type of health insurance that isn't covered by the company's health insurance plan, such as dental coverage.
What is compensation carve-out?
A compensation carve-out refers to the policy of keeping away a portion of the increase in compensation budget for the highest performing employees.
This method is used as a pay for performance measure by many organizations to induce performance amongst its employees. A modest carve out by a high number of performers can lead to significant rewards for the performers.
This carve-out approach impacts various points in the pay determination process- budgeting, communicating, inculcating expectations, evaluating performance and distributing rewards.
During budgeting, a portion of the entire bonus pool is allocated for the high performing employees to avoid any future conflicts. Example: Out of 100% bonus, 30% bonus could be allocated just for the high-performing employees.