6 components in a group pay for performance plan

Group pay for performance plan will affect the majority of your employees

Most of your employees are going to be under what’s called a group pay for performance plan. Here are key points to remember with group compensation administration

Assign incentive targets to all the people eligible for the plan.
Remember, we talked about how to figure out who’s eligible for the pay for performance plan, which is primarily an internal decision. But, you do have market data that you can rely on in this particular case.

Design a target incentive for the pay for performance plan
And, we talked a little bit about this. In the example, the step one example I’m giving you here the individual contributors at 10%, the managers 15%, directors 20%.

So, you know if the group achieves its goals exactly we’re going to put 10% away for every individual contributor, 15% for every manager and 20% for every eligible director in this plan. We know, exactly, how much money is going to be put into the pot or the pool or the fund, if, the company hits its assigned goals.

Calculate the incentive pool
After the goals have been established and target incentives have been assigned for every participant in the plan– based on how well the company performs against the goals that it has.

All pay for performance plan goals come down to revenue and net income

Net income is profits. And, you probably don’t want to pay any money at all, unless, net income achieve — at least in a positive area. And, revenue for sure, because you can’t really grow net income without revenue.

Now, you may weigh those two goals and there may be other things, but you – whatever you’re assigned at the incentive pool calculation, you need to weigh them.
You need to determine what kinds of priorities you place on each one of those goals. By the way, this is called a Balanced Scorecard Approach to group plans.

Measure actual performance in a group pay for performance plan
Actual performance in each goal area is what needs to be measured in group pay for performance plans. In my example, they achieved their revenue goal at a 105%. They meet that revenue was a 100% they achieve a 105 – I mean, a $100 million they achieve a $105 million. So they did a 105%.

Net income they did a 120%, you simply multiply those out. And, you get what’s called a Weighted Score. So, you add – and you add them up at the very bottom and you come up with a company overall score.

In this particular case, we did a 116% in the company overall performance score, it falls between 110%, 119%. So, we’re actually going to put a 120% of all the target incentives for all those people eligible. We’re going to set aside in a pool.

Distribute the incentive pool to the participants.
And, you may carry this step – this Balanced Scorecard concept even lower in your organization. There’s no reason why individual performance goal should be established for all the people eligible for incentives. And, you can set it up just like we did when we – the scorecard we set up in order to figure out how much money we’re going to set aside.

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