Employee Incentive Plans Work Both For Groups and Individuals
You have to put employee incentive plans into three categories: group plans, individual plans or combo plans. The individual employee incentive plans are those things that where the performance of an individual is directly measured and incentive is paid out to the individual regardless of how well the group does.
The good example of this that comes to mind is the sales people. Employee incentive plans for salespeople are set up so that if they achieve a certain level of performance against quotas or goals that they will receive an incentive award regardless of how well the company performs and probably even regardless of how well the sales division may perform. Those are individual plans.
The most common kinds of employee incentive plans we’ve run across are group plans. Group plans are essentially constructed in two steps. The first step is to create an incentive pool or fund. Generally, an incentive fund is generated by how well the group or the company in this case – the example about rate they give you as a company. How well the company performs on certain quantitative measures? Generally, if we boil everything down, it’s almost always profits and revenues at least two of those measures.
Depending on how well the company performs on these measures, a certain amount of money is set-aside in a pool to pay individual incentives. And that’s the combo part of it. The combo part says that the pool is distributed based on individual performance. And there are ways companies put in very elaborate systems on how to measure individual performance, so they can determine what percent of the pool each eligible employee should receive.
In order to make employee incentive plans like this one effective though, you really have to set up target incentives. You don’t really know how much you’re going to spend unless you know generally what we’re going to be targeting. But in order to pay incentives, set up target objectives. Such as using a percent of salary 5%, 10%, 15%, et cetera to model your incentive program. You’ll also need to figure out what the right goals are and sometimes this is difficult. In committee groups – group type plans, it’s easier to come up with performance measures than it is at the individual level. The performance measure on a group again, could be something like profitability or revenue or stock price or market share or something like that.
But, the problem with group employee incentive plans, and again most incentive programs are group-oriented type programs, is that certain individuals have more influence than others on how well that group performs. And the lower in the organization you go, the less influence that an employee has on the group goals. So, you have to consider what’s influence-able by the individuals in determining what those goals are.
You’ll also have to measure it and setting up non-quantitative measures for employee incentive plans is probably not a good idea. You have to concentrate on the group funding part of it or the funding of the incentive pool to use very quantitative measures. We also have to make a determination as to what constitutes average and exceptional performance. How big a difference do you want to make between these two levels of performance? Some companies are very egalitarian and they do make differences but small differences. Some companies stretch out the differences significantly with what a truly exceptional person can get and what an average person would receive.
Edited Remarks From “The 7 Deadly Sins Of Employee Compensation Plans (And How To Fix Them)” by Rick Olivieri
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