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Incentive plans that work

As Covid-19 looms over our daily lives and we strive towards learning how to work alongside the situation at hand, how does this affect our incentive plans and what can be done and adjusted to benefit our employees in spite of the current situation?

In the following article, Prof. Dr. Mark Bussin highlights some general guidelines in which incentive plans that could work!


Article written by Prof. Dr. Mark Bussin

How to design effective incentive schemes still eludes many organisations. Employee incentive plans go by many different names; you’ve undoubtedly seen your share. But, with many economies struggling, how should you approach your employee incentive plans differently to reach your organisations goals? Or, can an employee incentive plan actually create the results you need?

First let’s look at the bigger Remuneration picture and where exactly incentives fit in. At the start we have the base salary component- that guaranteed income which is for the complexity of work performed. Next is the benefit package that takes care of the health, wealth and needs of the employees. Perquisites aid in our ability to perform best at the job and effectively. Short-term incentives (Bonuses, incentives and commission) rewards what happened last year and Long-term incentives are for retention and shareholder alignment. For the purposes of this article, mainly bonuses and incentives are focused on.

There is growing distinction between the definitions of bonuses versus incentives. Bonuses can be defined as award after something good happens, but was not promised in advance in most situations. An incentive is a payment that is promised in advance in a performance period and in return to a specific objectively performance measure. Therefore the components of Total Remuneration are illustrated in the figure below.

Bonuses grab the attention of employees but do not motivate them for a long time period. From our view, bonuses have place in the remuneration mix, but the company should not spend a great of money on bonuses, because they do not motivate like incentives. They are safe but not influential.

Individual incentive plans are designed to reward employees for their improved commitment and performance at an individual level. Typically, goals reflect participant's specific responsibilities, and payouts are based on an evaluation of the individual's performance relative to present goals. Because participants often perceive the goals as controllable, individual incentive plans provide a clear link between pay and performance and will have a high impact on employee behaviour. Based on the article Test your Incentive Plans against these Guidelines Timothy O’Rourke and Matthews Young describe some very interesting guidelines which are worth repeating.

Guideline #1 – The potential incentive must be big enough to get the employees’ attention.

We know that well designed incentives make most employees focus. Good employees already work hard, but hard working employees who are not focused often work against the results the Company seeks. Incentives create focus. But, you have to get employees attention first.

Guideline #2 – The performance or results required to earn the incentive must be within the employees’ control or significant influence.

This one guideline has led to the failure or success of more incentive plans than any other guideline. One must be able to see or understand the cause and effect relationship between one’s effort, the results of that effort and the reward. The need to provide the proper “line of sight” between output and rewards at all levels of the company may require a large number of different incentive plans to cover all employees under incentives. The administrative requirements then become burdensome, and we have seen diminishing returns from an effort to cover an ever- increasing number of levels in the company. On the other hand, we have seen successful applications of different mixes of remuneration components for different levels of the company.

Guideline #3 – The performance or results required to earn the incentive must be perceived as achievable with “stretch.”

If I told you that I would give you a million dollars at the end of the next year, I would probably get your attention. And, your next question would be “What do I have to do to get it?" Then, if I told you that you would need to get yourself to Mars and back by the end of next year, I would lose your attention. No matter how good the promised reward, the employee must believe that the desired performance is achievable. Of course, Guideline #2 described above has a great deal to do