Important factors to keep in mind when creating compensation programs

by on June 19, 2009 · 0 Comment POSTED IN: HR Info Center

Group Compensation Programs are Generally a Two-Step Process

One of the decisions you’re going to have to make when you design these kinds of compensation programs, the incentive or cash-bonus type program, is whether or not you want a group plan or individual plan or some combination of those two.

Group compensation programs are generally a two-step process. It generally measures performance on a group basis. And if you have a company-wide bonus program, it could be revenue as one of the goals and the others could be profitability.

Assuming the company hits certain revenue or profitability targets, you fund a certain amount of money into an incentive pool. That pool may be increased if the company far exceeds its goals. And it actually may be decreased if it does not achieve its goals. And there may be even a certain point in which you put no money into this pool. Once the pool is created, there is a methodology in deciding how to award the people in the pool. Lots of companies use either a quantitative methodology or discretionary system to award that pool to the participants in this plan. That’s called a group plan, which essentially means that the group has to perform at a certain level in order for you to pay any bonus money.

Individual compensation programs generally reward based on how someone performed individually. How the group performed doesn’t really matter in this system. So, those are the two types of compensation programs but you can mix and match them. They could be 70% weighted to individual goals and 30% to team goals.

One of the things you have to do to start a program like this is to establish the target incentives for each job. And every company has to decide what that is. Remember, if you follow the principles of putting as much in variable expense of the total compensation package as you can, you might want to consider that in setting target incentives for your people.

There are companies who actually target salaries below the 50th percentile or median rates in the market place and give them more opportunity in compensation programs so they may make a lot more than they could if salaries were higher.

Compensation Programs Need Goals
You have to choose also the right goals. It may be difficult thing to choose the right goals for the right individuals or the right group. The most effective goals are ones that the participants in the plan can influence. Why state that they’re eligible for a particular incentive when they have no influence over what the results are going to be? It has to be measurable, hopefully quantitative in some fashion. And it has to be tied to company financial strategic goals.

And you also have to make the decision of what constitutes average and exceptional performance. In some cases, you really do have to use management discretion. In most managers’ minds, they actually have a pretty good idea of who’s the best performer, who is second best, who is third best, etc. And you might want to allow them some discretion in figuring out what these final awards are.

And finally, have a written document with goals. So at the beginning of the performance period they know exactly what’s required of them. These goals are what are going to be measured. This is what the definition of those goals is. And this is the quantitative target we’re looking for.

Edited Remarks from “The Seven Deadly Sins of Employee Compensation Plans (and How to Fix Them)” by Rick Olivieri

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