When business conditions are challenging, employee productivity is more critical than ever. Motivational incentive compensation plays a vital role in raising and maintaining high productivity levels, along with some other benefits—if you play your cards right. Otherwise, it can be a waste of money, or even set you back.
In addition to increased productivity, properly designed and managed motivational incentive compensation (also called variable compensation) can promote efficiency, employee engagement, retention, and enhance your brand as an employer.
Most companies provide incentive compensation for senior managers. Some also provide it for line managers and non-supervisory employees. As dramatic changes ripple through the economy, incentive plans put in place during more settled times may need to be recalibrated.
In general, long-term (multi-year) incentive compensation, such as stock options and equity appreciation rights in privately held companies, are typically limited to the CEO and other “c-suite” members. Short-term variable compensation opportunities can be built into the pay plans for employees at all levels.
Motivational incentive compensation
A member survey by WorldatWork, a compensation professionals’ association, indicates the prevalence of various kinds of short-term incentive plans covering some employees at privately held companies:
Annual bonus based on criteria set at the beginning of the performance cycle: 85% Discretionary bonus set after a performance cycle: 40% “Spot” rewards (based on contributions as they occur): 34% Team incentives: 22% Profit sharing: 22% Project bonuses: 13%
When incentive compensation is based on financial metrics, profitability is by far the most common (used by 77%), followed by revenue growth (49%), according to that survey. Common operational performance metrics include customer satisfaction, operational efficiency, service quality, and workplace safety.
Which employees typically receive incentive compensation? It’s important to have a consistent variable pay/bonus eligibility structure to avoid creating a confusing and haphazard system that could create resentment among employees who believe they’re missing out. Common eligibility classifications include job function, length of service, and exempt/non-exempt status.
Another way to define bonus eligibility is by the goal of each bonus program. For example, If the goal is narrowly focused, such as improving customer service, extra pay potential would logically be limited to customer-facing employees, without regard to specific job function.
Local labor market environment
Ultimately, your top consideration for incentive compensation eligibility is a combination of local labor market dynamics (what employers competing for the same talent are doing for their employees), and the specific kind of performance you are trying to maximize. It’s not obligatory to follow the crowd, however. You might become a pioneer in awarding incentive compensation to a category of employee that, at other local employers, lacks that opportunity. Doing so might result in your employees feeling special, and accompanying burst of performance.
Think carefully about the outcomes you are trying to achieve with an incentive compensation plan, and the performance metrics that reflect that outcome. For example, a goal like increasing corporate profits might seem like a logical outcome to build incentive compensation around, particularly if you’re looking for quick results.
But motivating quick results could come at the expense of longer-term goals. For example, does the kind of success you’re trying to achieve depend primarily upon doing what you’re already doing more efficiently, thereby improving current financial performance? If instead you’re looking at a longer time horizon, increasing employeeContinue reading