Measurement is vital in an incentive compensation system

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

The more you measure in an incentive compensation system, the greater the performance

So let’s now talk about incentive plans. In order to get the most out of your incentive comp plans, there are certain principles that apply to all jobs. The more you can measure individual performance, the more likely the incentive compensation system will succeed.

Not too many jobs can be measured quantitatively for an incentive compensation system. And we’ll talk about the sales group which is one of those sets of jobs that can be measured quantitatively. But for most positions, you can’t. To the extent that you can though, the greater chance you have of success in your incentive plan.

The more you can measure individual performance in an incentive compensation system, the more money you can target for incentives because you know what you’re going to get and how much you’re going to payout.

Risky behaviors in your incentive compensation system can result in risky behaviors at work
However, be aware that more money at risk, meaning more of the total compensation package put into the incentive portion of compensation will result in more aggressive risk taking behavior. In some cases, that’s great. That’s the kind of person that you want. In other occasion, it may not be.

What you measure – and I said this before, what you measure and pay for is what you get over time. Employees will get the picture after a while that they get higher salaries for doing certain things. Whatever can happen in incentive plan will happen, meaning that you should be prepared to address situations as they come up, okay? And win-win situations are always achievable. If you’re into the incentive plan area or you’ve got them in your own companies, you’ve got to believe in win-win situations. Those who have the most influence on their plan goals should have the most at risk. So, not everybody can influence goals to the same degree than others. Those who have the most influence, you can safely put more in the incentive comp area for those individuals.

Now, there are many decisions in an incentive compensation system, you’re going to have to make regarding incentive plans. They will have a lot to say about how motivated and successful your people are and generally, how successful the company will be. And these design decisions include what’s the total compensation target for every eligible participant.

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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