A Guide to Designing Incentive Compensation Programs

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Did you know that 51% of your employees are not engaged? For you, this means that you won’t be able to retain your employees, boost their performance, and create unique corporate culture.

One of the major reasons why such things happen is poor incentive programs. In the past, motivating your employees was all about offering monetary rewards and promotions. However, the times have changed and, today, people want to feel recognized and appreciated. They want to know what the criteria for earning a reward are and what exactly they need to do to get it.

staff compensation programs
Shutterstock Licensed Photo – By Artur Szczybylo

This is why you need to provide them with a well-planned, data-backed, and strategic incentive plan.

Here is how to do so.

Set Clear Objectives

To be truly motivating, your KPIs and rewards need to tell your employees what their impact on the company’s performance is. This is why you need to set your objectives clearly. You could use the so-called SMART system, meaning that all your goals should be specific, measurable, achievable, relevant, and timely.

Let’s take assessing your teams as an example.

For your sales team, one of the most significant KPIs you need to take into consideration is their impact on your revenue.

But, is this metric also relevant when it comes to measuring your IT crew’s performance? Of course it’s not. So, instead of assessing how they influence your cash flow, you will probably want to measure actions closely related to their obligations, such as system uptime or the average time they need to resolve certain issues.

So, when setting your goals, choosing your KPIs, and formulating your program, you should ask yourself the following:

  • What are you trying to achieve with this program?
  • Which teams/employees are eligible for the program?
  • How will you address overachievement?
  • Will you pay for partial achievement, too? If you will, then what are the criteria?
  • What are your major KPIs and how do they vary?
  • What are the elements of your incentives and how will you weigh them?
  • How achievable and realistic your objectives are?
  • How much control do your employees have over these objectives?

The Characteristics of a Good Incentive Compensation Plan

Not every incentive program is the same. It needs to be tailored to your needs, communicate your expectations and goals clearly and, most importantly, it needs to be relevant to your employees. Still, there are certain traits every performance bonus plan should have.

  • Clarity. You need to explain the purpose of the program and clearly state what KPIs you will be using during the assessment process. Your employees need to know what exactly you expect of them and what they will gain in return.
  • Transparency. You should send out a weekly report to all your teams so that they can see their performance and their impact on the company’s net profit. You should also show the bonuses they’ve earned so far, as well as make estimations for their future bonuses. Once the program is over, you should tell them how they did. This way, your employees will know what must happen for them to get a reward, be able to assess their performance over time, and estimate how big their bonuses will be at a given moment.
  • Objectivity. The incentive program should never depend on an executive’s personal assessment of their employees’ performance. It needs to be based on actual KPIs and objective assessments. It should never prioritize one team over another, either. For example, rewarding a sales team without incentivizing your customer support team or warehouse crew is both demotivating and unethical. Remember, your employees all pull together and their hard work should be recognized.

Always Ask your Employees for Opinion

This whole idea behind creating incentive programs is to make your employees feel appreciated and valued. And, one of the most effective ways to show how much you care about them is to give them the opportunity to participate in the creation and the implementation of your incentive program actively. Keep in mind that, in order to work, the rewards you offer should make sense for your employees. So, ask them for feedback to understand what kind of rewards they expect to get. By offering relevant incentives, you will motivate them to try even harder in the future and, at the same time, they will appreciate your investment into their satisfaction and well-being.

Types of Incentive Programs

When designing your inventive program, you need to bear in mind that each of your employees is unique. They have different goals, priorities, habits, preferences, and worries. And, to boost their motivation and performance, you need to consider offering different types of rewards.

Some of the most common options are:

  • Performance-based rewards are created around variable rates of pay, based on an individual’s or a team’s performance. If you choose the right KPIs and set clear objectives, this could be an extremely effective way to boost people’s morale.
  • Stock options- like its mere name says, this plan gives your most loyal employees the opportunity to buy a certain number of your company’s shares at a prearranged price. This is how you will show them that you trust them and believe in their future advancement within your company.
  • Gainsharing plans revolve around fostering better communication, teamwork, and positive corporate culture. Simply put, as your employees’ performance improves, your revenue grows and you share it with your employees.  
  • Recognizing achievements. Some people prefer recognition over monetary rewards. This could be anything that works for your employees, be it traditional “employee of the month” plans, extra vacation days, flexible working arrangements, public praise, or even a personal thank you note coming directly from a boss.

Evaluate the Effectiveness of the Program Regularly

As your business grows, your goals change, too. This is exactly why you need to make your KPIs easy to set, track, and change over time. And, to make sure if an incentive plan works for your employees, you need to assess its effectiveness regularly. Once it’s over, you need to measure its ROI (Return on Investment) and people’s morale in general. Even though there are numerous ways to calculate your ROI, one of the most effective ways is the outcome-based approach. Namely, you’re tracking your KPIs before, during, and after the program.

Ask yourself stuff like:

  • Were my goals realistic? How many people stayed within the program, compared to the number of people that participated.
  • How many of all those people met my expectations?
  • Did the end results meet my initial estimations?
  • Was the initiative cost-effective?

Key Takeaways

An incentive program is a true double-edged sword and, if not planned and implemented strategically, it may represent a massive barrier to boosting your employees’ motivation and achieving the desired results. So, make sure you set your goals clearly, track the right KPIs, and align your employees’ preferences with your company’s goals. Most importantly, don’t forget to track the effectiveness of your incentive plan and constantly revamp it to make it more relevant.

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