Seven vital components to determine rewards in an incentive compensation system

by on June 16, 2009 · 0 Comment POSTED IN: HR Info Center

How to determine the salary mix in an incentive compensation system

What things are we going to measure for the incentive compensation system? Are we going to have a group or an individual type plan group, meaning that we’re going to measure performance on a group basis for the most part and an individual plan meaning we’re going to just measure. If there aren’t going to be any group measurements, we’re going to measure everybody on their individual goals.

In the a sales incentive compensation system is it going to be a revenue plan, meaning we pay our salespeople a certain percent of revenue they generate or is it going to be a quota plan, we pay them – in order words, we’re going to pay them a certain percent of that incentive target based on how well they do against some sort of quota.

  1. Threshold.
  2. You have to determine if you’re going to have a threshold in your incentive compensation system. And if so, where is that going to be? And by that we mean at what point do you begin generating money to make incentive payments. Is it 70% of the goal achieved? Is it 90%? Is that 100%? Are you not going to have any threshold at all?

  3. Targets in the incentive compensation system
  4. The target generally refers to the target incentive amount. And every eligible person in the plan should have an incentive target amount. That refers to the amount that you’re going to pay when objectives are achieved 100%.

  5. Maximum limits in an incentive compensation system
  6. You can also have to determine whether there are some sort of maximum on your incentive plan, even a maximum funding in a group plan or a maximum award amount for an individual plan. And if you are going to have a maximum, at what level do you step that maximum? A hundred and twenty-five percent of goal? A hundred and fifty percent? Where is that going to be? And it has a lot to say about how motivated your people are going to be.

  7. Accelerators.
  8. These are the points at which the pay level actually increases – given increases in performance against a goal or quota. Where are they going to be set? At what point do you start funding more money in a group plan or paying out a larger percent of a sale to salespeople? Difficult questions and complex questions.

  9. Goal based links in the incentive compensation system
  10. An incentive plan sets predetermined goals, beginning the performance period and pays rewards based on the achievement of those goals at the end of the performance period establishes an incentive link, meaning that you tell people exactly what you expect of them at the beginning of a performance period and then you pay out like you said you would at the beginning of the performance period. You pay out based out on how well they perform so they know what they need to do, right, and how much they’re going to get.

    You have what I would call a bonus plan though if you really don’t set very specific goals at the beginning of the performance period. And even though you paid bonuses to individuals, a lot of people may scratch their head and say, “I’m not sure why I got this but, hey, I’ll take it.” Right. To me, that’s a bonus plan. It has less of an incentive plan link in the first example.

    For jobs that are incentive eligible, you want to first establish a total target compensation level that’s equal to the market target total compensation. And this is base salary plus target incentive, not actuals last year’s. It’s target incentive.

  11. The amount you put into the incentive compensation system.
  12. For example, you may not give salary increases but you may want to increase – for 2009, but you may want to increase the incentive opportunity for your people if the company achieves a certain level of performance. You’re going to leverage your employees more. Even though they don’t get salary increases, you’re going to give them more incentive opportunities.

  13. Take away base salary and put more cash on the table with an incentive compensation system
  14. And what happens is this is now – it’s not paid though unless the company achieves the target performance. So there’s no cost to doing this if the company doesn’t achieve its goals. Gently trade off though between $1 of lost salary increase is about $2 of increased incentive opportunity. It’s not a dollar for dollar kind of trade off. Otherwise, I think your employees are going to view this as a takeaway. But you can put more money out there in incentive opportunity even if you aren’t having salary increases this year.

Edited remarks from the Rapid Learning Institute webinar: How to Set up Fair and Effective Pay Plans in an Uncertain Economy by Rick Olivieri

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