Benefits and Compensation

Should Incentive Plans Be a Component of Your Compensation Program?

In a BLR webinar titled “Smart Compensation Strategies for Small Employers: How to Maximize Your Budget and Reduce Legal Risks,” David J. Wudyka outlined some tips on implementing effective incentive plans.

Why Implement an Incentive Plan?

Incentive plans can be an effective part of a company’s compensation strategy. However, it is important to analyze whether or not it will work in your organization; if you implement an ineffective incentive plan, you could end up spending more money without any real tangible benefit.

So, what are the benefits of using incentive plans? Wudyka advised that “we think that we can drive performance upward in our company in some ways, maybe because you think that employees in the company are under-performing, maybe because you think that they can be motivated to work harder and/or work smarter.”

These are all reasonable factors to consider when implementing incentive plans. However, if we are wrong on these assumptions, implementing an incentive plan can be counter-productive or a waste of time and money if there is no behavioral impact upon people who are eligible for the payout.

Wudyka further advised that “we want to make sure that we use these in the right situations because we think the company is under-performing in some way – or perhaps a segment of the company is under-performing – and therefore incentives would be wise to use.”

There are several reasons these plans occasionally fail, including:

  • poor design (consider external help if necessary)
  • inattentive administration or oversight (it is a common mistake to set up such a plan but not manage it actively)
  • market failures (the design may be good, but the market cannot produce results that lead to payout)
  • nature of workforce (consider your company culture and how an incentive plan would fit)

Common Incentive Plans

If you still want to implement an incentive plan and are convinced it will be a success in your organization and market, it’s good to know some of the most common types of incentive plans out there. These include:

  • Sales incentives
  • Skill-based pay (reward people for acquiring new skills)
  • Gain-sharing (group bonus plans related to profits)
  • Individual, group, and team bonus plans (you can implement multiple levels of incentives if it makes sense in your workplace, with differing objectives)
  • Executive incentive plans

Some common traits to any incentive plan design:

  • Goals to achieve
  • Standards by which the performance is measured
  • Measures/metrics
  • Time frame/deadlines
  • Rewards should be specified in advance
  • Policies should be documented to avoid misunderstandings

By carefully considering what type of incentive should be offered and ensuring it will be compatible in the workplace, employers can motivate employees and impact the bottom line with effective incentive plans.

David Wudyka, managing principal and founder of Westminster Associates, manages and oversees all company operations, including the design, development, and implementation of all client HR programs. His specialties include human resource analytics, audits of HR operations, employee retention strategies, and group incentive plans.