Incentive plans can be a great way to prompt productivity improvements, but only if they’re implemented effectively. Incentive compensation is also a key consideration when you’re trying to retain your highest performers. What type of incentive plan would work best for your team?
Overview of Incentive Plan Options
Incentives are typically implemented with the goal of focusing attention on specific desired results. They allow an organization to more closely tie pay to work and results by providing "at risk" compensation as part of the total compensation package. This can also allow organizations to improve how competitive their total compensation package is without raising base salaries. But how do you know what type of incentive plan is right for you? In a recent BLR webinar, Paul R. Dorf gave us an overview of some of the various types of incentive plans:
This is an award that is formula-driven, and focuses on a short period, up to one year. Generally it involves a situation where there are cash awards based on performance; the at-risk nature provides motivation to meet the goals. This is most useful to implement for positions that can substantially affect outcomes, such as sales groups.
These are incentives offered in advance to influence longer-term results, typically greater than one year. "In many cases these are restricted – much more restricted to senior-level executives/managers." Dorf explained. These types of incentives are often based on business unit, department, or corporate numbers. These types of incentives are predominantly paid in stock for publicly-traded companies, and private companies use awards that mimic stock.
Individual Incentive Plans.
Separate from the time component, incentive plans can be individual, group, organizational or a combination of these. Individual incentive plans are based on meeting work-related performance standards in terms of quality, productivity, customer satisfaction, safety, or attendance, for example. These are most appropriate when performance can be measured objectively and employees have control over the outcomes.
"You need to be able to track it, you need to be able to measure what the individual is doing, and it has to be done in a way that is consistent with good management practices." Dorf advised. "You have to, obviously, have the ability as a company to track the performance." A word of caution, however: when implementing individual incentive plans, be careful to ensure that the plan does not create unhealthy competition among workers.
Team or Group Incentive Plans.
Team or group incentive plans are rewards for collective performance. They are most effective when all group members have some impact on goals. You can choose the best implementation: rewards can be equal for each member or can be differentiated. However, be sure you can measure and substantiate performance if you’re going to differentiate. Going this route requires a thorough understanding of team dynamics. You will also need to be careful to avoid creating contrasting motivational forces.
Organizational Incentive Plans.
Organizational incentive plans are rewards based on performance of the entire organization. This type of incentive plan removes the direct line of responsibility for outcomes since it is based on organizational outcomes. These types of plans are often utilized at the executive level to encourage teamwork and productivity. As you move down the organization, it makes more sense to implement more direct incentives tied to specific individual outcomes.
In a related article, Dorf answers specific participant questions about different types of incentive plans.
For more information on choosing and implementing incentive plans for your organization, order the webinar recording of "Incentive-Based Comp: How to Design and Install a Plan that Drives Peak Performance." To register for a future webinar, visit http://catalog.blr.com/audio.
Paul R. Dorf is the Managing Director of Compensation Resources, Inc. (CRI) . He is responsible for directing consulting services in all areas of executive compensation, short and long-term incentives, sales compensation, performance management programs, and salary administration programs.