An Incentive compensation plan and a bonus reward are not the same

Information about an incentive compensation plan needs to be upfront and honest

Blunders are being committed time and time again in compensation management because of the difference between an incentive compensation plan

An incentive compensation plan is something that’s clearly communicated upfront where we have the calculations. We know exactly what the metrics are, we know the performance levels so that we can say to an employee whether they be high-level or low-level in our organization, “If you achieve X, we will pay you Y.” That’s an incentive for them to achieve X.. “If you achieve X, we will pay you Y”,

We get to the end of the year and, “Hey I got a check for $3000” or “Hey I got a check for $30,000.” I’m not real sure exactly why that is? How it was calculated? What I did to earn it, what somebody else may have done to earn it? Well if the company may have done something good to earn it, there isn’t that direct link.

In an incentive compensation plan, we want to communicate at the beginning of the year, here’s what we want you to achieve, here’s what we will pay you for achieving it.

A bonus is kind of a congratulations for something we’re not sure what it was.

Track performance in your incentive compensation plan
To effectively communicate your incentive compensation plan goals, performance should be compared to the target on at least a monthly basis particularly when you’re talking about corporate objectives.

And the end of January, when we close the financials are we on pace to hit our corporate goals? Are we behind schedule, are we ahead of schedule? If we’re behind schedule maybe there’s some discussion as to what we can do to make up for that.

If we don’t communicate what those goals are, and we don’t communicate on a monthly basis, how are we tracking again those goals, it’s nearly impossible, if not impossible, for us to correct mid-course. A best practice would be to sit down and make sure that the people who have those corporate goals understand those on a monthly basis.

Discretionary components in an incentive compensation plan
A lot of managers are big proponents of discretionary increases, whether it be in a base pay or an incentive amount. But in order to drive performance proactively, not reactively, get back to the definition of an incentive versus the bonus.

If you can remove discretion and say, “Here’s what I want you to achieve, whether that be a CEO and I want you to achieve our exit strategy of being bought up by publicly traded company” or “We want you to achieve revenue growth of 30% this year.” It can be at a lower level for that HR generalist. “We want you to put in place a diversity initiative”. “We want you to put plans in place that will help us reduce turnover by 10%”.

By removing that discretion from an incentive compensation plan, we can drive performance proactively as opposed to at the end of the year saying, “Yeah, somebody did a good job on this. We didn’t really tell him to do that but they to choose to that on their own,” you can end up with a discombobulated workforce.

Edited remarks from the Rapid Learning Institute webinar “Incentive Pay Plan Blunders That Can Cost You a Fortune.” By Kevin Nussbaum and Ed Rataj