5 Best practices for your Incentive Plans !!!

Incentive plans are known to be most effective tool for any organization to motivate employees to perform at next level.

Remember, the fixed pay you give to employee is for no. of hours you have contracted that employee for and for his/her right intentions for the company. Also, this is for optimal output expected from the job.

Why then Variable pay or commissions or incentives are required is million-dollar question? Well, most people give optimum output which is generally average/slightly better than average performance for any organization. Therefore, you provide additional compensation called as variable pay or incentives in lieu of additional efforts an employee put in to achieve much higher than average performance which benefits the organization directly or indirectly.

Let me use variable pay or commissions or bonus or incentives here as incentives for ease of writing. Which is what is different topic of discussion.

Coming back. So now, you have decided to keep incentives for your employees, but how are you going to pay and how much. For that, you design performance measures or key parameters or components on which you measure additional efforts the employee has put in for benefit of the organization.

You then create Incentive plans which combine these performance measures and define how much should be given to an employee. While designing these incentive plans, there are few best practices which help in making the employee get compensated rightly. Therefore, the smarter you design your incentive plans, the more productive your employee grows and hence your organization grows. “We must remember organization performance or productivity is nothing but SUM TOTAL of performance OR productivity of all its employees. Negatives cancel positives and positives off course add up.”

Below are few best practices for designing right Incentive Plans for employees to create more positives for organization:

1) Most importantly, your performance measures should be based on the behaviors the organization intends to drive from the employee.

 E.g. I have seen many organisations using Company Profit or EBITDA as performance measure for most of the employees. Remember if the employee cannot in any way impact company profit/EBITDA directly, there is no way the employee will try to work harder to achieve higher incentive. Therefore, the motivation of additional effort for organizations goes down and so is the productivity.

“Key point to note is that Employee may have great performance rating but may not be productive for the organization”. As in many organizations, performance rating still can be managed through right perception and right connects. Hence, combination of performance measures which actually determines additional effort from employee is great tool to substitute perception management in organizations.

2) Ideally, performance measures should not be more than 3-4. And none of them should have less than 20% weight.

As less than 20% weight will start being too small for employee to motivate employee to push up efforts to keep that performance measure high.

And too many performance measures bring in complexity and lack of focus in overall Incentive plan for the employee.

Critical is to keep all performance measures or components independent of each other.

3) Incentive Plans should not be based on activities but outcomes which deliver business objectives.

“Remember to pay for right results and not for activities.”

Though there may be some exceptions like case of new hire who may be judged on right activities for first 3-6 months.

4)  Design of incentive plan should highly differentiate star performers from median performers.

This means that employees who are putting in real hard work for organization should be rewarded with much higher incentives than those who are just slightly higher than average performers.

This is important for pushing your median performers towards star performance and for star performers to keep putting in efforts to remain star.

5) Most obvious but important, Launch your incentive plans before the plan effective date.

This shows your seriousness and commitment to respect those who work tirelessly for benefit of the organization and organization benefits them with higher incentives.

Also, review your plans periodically, at least every year to make sure of following:

• Is incentive plan aligned with evolving and dynamic business objectives?
• Is your incentive plan rewarding right behaviors expected from the employees?

Above 5 are most critical practices for any Incentive plan to be highly effective.

It goes without saying that Incentive plan may be your Sales incentive plan or Commission plan or Bonus plan or whatever name you call them, above best practices will be applicable to all.

Happy Incentivizing!!!

About Varun Gupta

This article is authored by Varun Gupta. Varun is CEO of Atmax Technologies which specializes in Cloud solution of Incentive Management and Total Compensation Management. His interest areas are Sales Incentives, Compensation and Benefits, Sales Enablement/Effectiveness, HR Technology and Entrepreneurship. You may get more details at www.atmax.co or reach him at [email protected]

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