Use Incentives For Employees Effectively

by on June 15, 2009 · 0 Comment POSTED IN: HR Info Center

Incentives For Employees need to be measurable

The use of incentives for employees has increased dramatically over the last 20 years. It will continue to increase. Seventy eight percent of American companies use incentives for employees based on performance.

Twenty five years ago, the only people who are eligible for incentives were assembly line workers, generally piece rate type jobs or CEOs and executives at major corporations. Now, lots of people are eligible.

And spending on variable pay has actually increased. In 2005, it increased 2% points of total payroll. And ten years from now the average employee could have 20% of their pay at risk or put into some sort of variable compensation plan.

In order to get the most out of your incentive compensation plan, there are certain principles about designing a plan for incentives for employees.

You have to believe in win-win situations. You must believe that the employee can win and the company can win. Otherwise, why do incentives for employees?

Here, what you measure and what you pay for is what you get. That’s a blessing and a curse. So you have to be somewhat careful about choosing the performance measures that you put in to incentives for employees.

The more you can measure individual performance, the more likely the incentive plan will succeed. And by measuring individual performance, we’re really talking about quantifying individual performance. The more you can do that, the more money you can put at risk. You’ll know this is what I’m going to get. And this is what I have to pay. You’ll know in quantitative terms what that trade off is.

The more money at risk though will result a more aggressive risk taking behavior. So just pay attention to that. In some cases, we really do want very aggressive risk taking individuals. In other jobs, we may not.

And finally, whatever can happen in the incentive plan will happen. So be prepared to use some management discretion in your incentive plan to make the calls you have to make because dollars to doughnuts you’re not going to be able to think of every situation that will occur.

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

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