An Employee Incentive Plan Should Allow Some Managerial Discretion

In a group employee incentive plan, it may be much easier to figure out what the group performance measure should be. It should be things that people can influence, that they have some control over, that you can measure and that are tied to the company’s financial strategic goals. If they don’t tie to company’s financial strategic goals, why are you doing this and why are we measuring this and why are paying people on those performance goals.

You have to also figure out what corps to average an exceptional performance. If, you choose to vary the payouts in a group plan based on individual performance, you have to figure out what an average person would get. That’s fairly easy thing to do. Based on the number of people and what everybody’s target incentives are and the money you generated via pool, you can mathematically figure out what an average person should get as percentage of targets.

Where it becomes a little bit more difficult is how much is paid to individual performance that is different than average, either below average or truly exceptional. Is there a maximum that you will give to somebody? Should truly exceptional people, maybe, make twice as much – get twice as much out of the bonus pool as an average person?

Those kinds of decisions have to be made. There’s no formula for determining this. And, you’re probably not going to be able to pick a textbook out from and figure this one out. It’s going to be almost a cultural kind of decision.

The other thing I would suggest for an employee incentive plan is try not to be afraid of management discretion. When I see companies who are developing an employee incentive plan for the very first time, there’s a tendency to want to quantify every aspect of the incentive program. In certain cases, it’s probably okay to give management some discretion. To develop an incentive program, that will cover every situation 100% of the time, is almost unrealistic.

If you’re going to write the employee incentive plan up and try to do that, you would probably have a plan document that would be 30 – 40 pages long. And, there’s one truism in incentive compensation: If people don’t understand what’s expected of them and what they could earn, you have no incentive program.

So, you have to balance being very specific about how certain situations will be handled. But, at the same time not making it so complicated that people don’t understand how they’re going to get paid, because, if, that’s the case you’ve lost the incentive link.

Edited Remarks from “Incentive Talk: How to Design an Incentive Plan that Works for – Not Against – Your Company’s Goal” by Rick Olivieri

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