Incentive Compensation Plans Fall Into Three Groups

by on June 26, 2009 · 0 Comment POSTED IN: HR Info Center

Decisions To Make To Develop Good Incentive Compensation Plans

No two incentive compensation plans are exactly alike. But generally, you can break incentive compensation plans down into three different types– group plans, individual plans or combo plans. Individual plans pay employees based on individual effort only. Generally, the type of people who are eligible for individual plans are salespeople. We’re able to measure their individual performance and we pay them based solely on their individual performance. How well the group does whether it’s the sales department or the company does doesn’t really matter.

Group plans and these could be things like a companywide bonus program. These types of programs actually pay people on two criteria. First of all, there generally has to be some overall group performance measure met, either on a company basis, department basis or a combination of those two and then money is eventually distributed to individuals. And finally, you may have a combination of these plans, group versus individual plans.

You have a number of major decisions that you have to make in designing incentive compensation plans. The first thing you probably need to do is establish a target incentive for each job. What we’re trying to do is establish an incentive link in an incentive program. And there has to be a clear connection. And that’s opposed to things that essentially say to employees, “You’re eligible for bonuses. And as long as the company and you do well, you’ll receive some bonus at the end of the year.” But wherever possible, you want to establish this incentive link when they know exactly what’s required of them at the beginning of the performance period or the beginning of the year and what the possible payouts may be for them. Now, that’s a true incentive link.

Needless to say, set up target incentives for each job that’s going to be eligible for incentive compensation plans. And it’s generally expressed as a percent of base salary rather than some sort of dollar amount. Choose the right goals. They have to meet goals that employees are able to influence. Although there’s differences of degrees here, it’s not necessarily a black and white kind of an issue. For example a companywide bonus programs where junior exempt employees are eligible for bonuses. They may not be able to affect certain goals for funding of a companywide program. But to the extent possible, make sure that they have some influence on the goals that are assigned to them.

Be able to measure their performance. And not only their performance but group performance. At least measure the group performance on a very quantitative basis. And to the extent possible measure individual performance on a quantitative basis. But that’s not always achievable.

Third, tie the goals to the company financials and strategic goals. And generally, this is – if we do everything right, the goals that are set for incentive compensation plans should be cascaded down from whatever the goals are for the company in general. And they have to be somewhat related in nature. If they’re not related, why include them in your incentive compensation plans. Remember, what you measure is what you get over time. So make sure you choose the right goals.

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

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