Benefits and Compensation

Incentive Pay for Non-Exempts? Sure, But …

By HR Daily Advisor Staff Sep 21, 2012 Benefits and Compensation

Updated: Sep 21, 2012

Cherry and Green, both of whom are principals at HR consultant Hay Group, offer the table below to show how incentives fit into the total rewards picture. They offered their remarks at a recent webinar hosted by BLR/HR Hero.

 

Compensation type

Comment

Value of being a member of the organization

Benefits/
Perquisites

Little flexibility,
stable, enduring,

Value of your role

Base salary

Somewhat flexible
less stable

Value of your results

Incentive pay

More flexible, little stability

Value of your contribution to a particular initiative

Recognition, spot bonus

Flexible, volatile

Purpose of incentives

Cherry suggests that typically incentives should:

  • Attract, retain, engage and motivate talent
  • Change and direct employee behavior
  • Reward top performers
  • Control fixed compensation costs
  • Self fund variable compensation costs
  • Share the risks of the business with the one of the core stakeholder groups— the employees
  • Enable employees to identify with and share in the success of the organization
  • Send a message regarding company values

Finally, a simple but comprehensive guide to wage and hour. Correctly apply the FLSA, remain the go-to expert with BLR’s comprehensive guide. Save hours of research time.  Go here for information or to order Wage & Hour Compliance: Practical Solutions for HR

Factors to Consider in Plan Design

In assessing the best plan design for your situation, consider the following enablers and barriers to variable pay:

  • Business Focus: Extent to which the organization has a clear focus on consistent goals and directions.
  • Team Dependence: Degree to which accomplishments depend on integrated efforts among employees and departments.
  • Empowerment: Extent to which employees are encouraged to take risks and suggest improvements.
  • Willingness/Ability to Change: Degree to which employees trust supervision and are motivated to get the job done.
  • HR Programs: Effectiveness of measuring job performance and the perceived equity of the reward systems. You have to be able to measure and track performance.

Cherry offers a table to emphasize the factors that help make an incentive program successful:

Strategy

Design

Execution

  1. Clear understanding of what the team/ individual has to achieve and why
  2. Minimal external/ uncontrollable factors at play or plan in place for how it would affect the incentive
  3. Commitment to review and re-evaluate against strategic and tactical criteria
  1. Employees have been involved and remain engaged in the design and operation of the plan
  2. Early first drafts have been reviewed with key constituents
  3. Tools/ resources are in place to enable employees to reach goals
  1. Clear management support
  2. Dialog with employees and investment in communication
  3. Poor performance has been tackled via performance management
  4. Employees understand the metrics and the business
  5. There are clear expectations for performance

Watch out for those uncontrollable factors, says Green. For example, in wineries, you might be tempted to measure workers on the quantity of grapes, but that’s a factor of weather. So it’s better to measure production or waste or some other factor more within control of the workers.

Wage and hour lawsuits are expensive—and easily prevented. Here’s how to protect against crippling judgments. Go here for information or to order Wage & Hour Compliance: Practical Solutions for HR

Six Types of Incentive Plans

Green outlines six approaches to incentive design for non-exempt employees. The table below shows advantages and disadvantages for each approach.

Plan Type

Overview

Advantages

Disadvantages

Discretionary

  1. Payout is based on leadership judgment of contribution and achievement. Most common in smaller organizations; little infrastructure
  1. Flexible
  2. Allows manager to reflect effort and intent; not just result.
  1. Questionable motivation value.
  2. Can create perception of inequity; may effect retention.

Profit Sharing

  1. Pool is generated from earnings above threshold.
  2. Pool is distributed evenly, either as percent of pay or equal amount.
  1. Common fate approach; everyone is paid on same criteria.
  2. Company does not pay if it can not afford it.
  1. Not a clear link between pay and individual performance; does not always get attention.

Balanced Scorecard

  1. Payout is based on achievement against 3 to 5 measures.
  2. Payout is the weighted average of achievement
  1. Drives focus one key measure, but not at the expense of others.
  2. Builds holisitic view of the business.
  1. In group plans, link between pay and performance can be undermined.
  2. Smallest measure tends to be ignored
  3. Can be complex.

Gainsharing

  1. Group plan with financial measure driving funding or having the greatest weight.
  2. Typically found in non-exempt or team-based work environments.
  1. Most successful when merged with TQM, customer service, or similar initiatives.
  2. Excellent vehicle for teaching the business.
  1. Can become an entitlement if based on standards or goals are not updated.

In tomorrow’s Advisor, the rest of the incentive types, plus an introduction to the guide some call the “FLSA Bible.”

1 thought on “Incentive Pay for Non-Exempts? Sure, But …”

  1. Any thoughts on which of the incentives is most effective? Are some more appropriate for certain jobs than others?

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *