helping employees stretch toward strategic goals

Aligned with your strategic goals

Incentive compensation can help you achieve specific objectives, but proceed with caution.  The best way to guarantee failure is to pick up the latest New York Times Top 20 business book and assume you can apply any particular chapter to your organization. Like wage and salary plans, incentive plans need to be based on fundamental business principles aimed at achieving your strategic plan. ElementOne works with organizations to determine whether incentive compensation approaches are appropriate and practical, and to ensure that everyone concerned knows exactly what such plans might accomplish.

Incentive vs. Bonus

“Incentives” must be distinguished from “bonuses,” as the two have completely different meanings.  A “bonus” is a reward, after the fact, for some type of results, which might be individual, group or organization-wide.  An “incentive” is something that is promised, in advance, to be paid in the event a group or individual achieves pre-established objectives.

When do incentive plans work?

Extensive research demonstrates that incentive programs can have significant downside when managed poorly, and only limited success when done well. Some of the keys to success in incentive compensation program design include:

  • Incentive objectives represent “stretch” performance – not paid for reaching results that are already part of the job and for which employees are already receiving a salary.
  • The ability to achieve the objectives must be under the control of the individual or group – no “excuse” for not achieving objectives.
  • Objectives are tied to both long-term strategic and short-term operational goals, to further an important purpose.
  • Objectives change frequently based on the objectives of the business and the business climate.
  • Sufficient time allows for preparation to reach objectives, preferably well before the measuring period begins.
  • Objectives are tested against each other – reaching one does not cause failure to reach another.
  • Rewards are balanced with their value – reasonably reward the organization paying them, and reasonably reward the effort required to reach them.

Organizations should be wary of an incentive plan – such a plan works only if it results in the behavior and outcomes wished for by the organization.

Incentive compensation plans come in several types, typically tied to the organization’s purpose in establishing them. Common types of programs include:

Annual Incentives

Annual incentives are “short-term” programs measuring performance over a relatively short period of time. They are easy to tie to annual objectives and are paid frequently enough to be perceived as motivational. Objectives can be numerical or might reflect completion of assignments or initiatives. A shortcoming of annual incentives is that the goals established are frequently those that should not need an incentive – achieving results that the organization already pays for in a base salary. Annual incentives can be:

  • Organization wide
  • Team/department/functional
  • Individual
  • A combination of any or all of the above

Long-term Incentives

Long-term incentive programs are usually designed to reward performance over a significant amount of time, typically three to five years. This type of plan should measure achievement of strategic objectives and will typically mirror a strategic plan. Long-term incentive plans may be established every year, with multiple cycles occurring at any given time. Because of the strategic nature of the objectives, participation in this type of plan is typically limited to senior managers and executives. Long-term incentives often use equities (stocks) or equivalents, particularly in publicly traded companies.

Commissions and Individual Performance

Incentive plans can be set up to measure individual productivity, sales efforts, or any other type of ongoing individual performance. These types of plans generally have fixed objectives and will not vary from year to year. They are often perceived less as “incentives” and more as payment for continuing to deliver expected results.