Should Nonexempts Get Incentive Pay?

Yes, pay for performance applies to all levels of jobs, says consultant Katie M. Busch, but there are some caveats when you offer incentive programs to nonexempts.

Variable pay is a powerful communicator of values and directions and changing business needs, says Busch. However, with nonexempt employees, it is particularly important that:

• The amount of the incentive be market competitive and significant enough to reward in a meaningful way.
• The amount of incentive (aka, pay at risk) is not so large that missing the target would “bankrupt” a lower-level employee (typical incentive is 3 percent to 5 percent of base).
• The plan is simple and there is a clear line of sight to connect the individual/team performance with goal achievement.
• The organization uses other forms of variable pay too, including recognition, non-monetary rewards, and bonuses.
• The organization’s base pay and incentive pay be in line with that of competitors.

Incentive Pay vs. Bonus Pay

Bonuses can be a valuable component of the total pay package, but incentives really drive performance, says Busch. We often interchange “bonus” and “incentive” but there are key differences, she adds.

Incentive pay and bonus pay do share many features:

• Tied to performance
• Variable
• Any form of a payment:
• Monetary value
• Cash
• Equity
• Nonmonetary
• Merchandise
• Travel

However, there are key differences. A bonus:

• Is an award after the fact.
• Employees don’t know exactly what behavior or performance level will yield the bonus. What behavior will yield a $1,000 vs. a $500 bonus? Employees typically don’t know. They just know that if the company does better, they will probably get some money.

With an incentive plan, however, the rules are clear: Achieve a certain specified target (or, often, targets) and a specified payment will be made.

Note, says Busch, that since things change all the time, you may want to build some flexibility into your program. Incentives need to be dynamic, with a continuing need to make adjustments to align with the business strategy and operational goals.

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Key Questions Before Moving to Nonexempt Incentives

Busch recommends answering the following questions to be sure that you want to move toward including nonexempts in your incentive program:

• Are your base pay and other payments and benefits competitive in your market?
• Will the incentive program link employee and/or team contributions to the organizational success?
• Will the metrics and targets help to influence employee behavior?
• Will it motivate and engage employees?
• Will employees strive to increase productivity, efficiencies, or sales because the reward for success is meaningful?
• Will it help the organization maintain a competitive place in the labor market while controlling compensation costs?
• Will their participation in the plan reinforce the organization’s values?
• Do the communications around the plan make it clear that the incentive pay is not an entitlement, but a reward for performance and results that go “above and beyond”?
• Will the plan maintain a clear “line of sight” for employees between their contribution and the company goal?
• Will the financial gain resulting from the program exceed its cost?
• Will your payroll and recordkeeping systems support the proper recalculations of the regular rate of pay and any overtime?

Employee Involvement Helped

One client found that it was very effective to ask individual employees and work teams to help define the measures related to the company’s three main goals: improved customer service, product quality, and on-time delivery.
This process made clear what rewards would be meaningful to the team members. The teams also discussed some questions that are often ignored, such as, how do we handle incentives for new employees who come in part way through the incentive measuring period?

Other Critical Concerns

• Overtime issues. You must review nonexempt overtime for the incentive award period and redo overtime calculations for that period. (The DOL has a calculator at http://www.dol.gov/elaws/otcalculator.htm, Busch notes.) One client decided against monthly and quarterly nondiscretionary incentives because of the hassle factor of recalculation, and went to a discretionary plan.

• Triggers. Many plans have triggers, meaning that the overall business has to meet some sort of target for the plan to be funded.

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Issues for team-based incentive plans:

• Team kicker. Some individual plans add a team kicker—that is, if each team member reaches his or her goal, all get an additional incentive. This helps the team focus on helping one another get all the work done. This could be based on customer satisfaction, productivity, or other end result.
• Poor team member. You need to plan how to manage bad performance, that is, folks on the team who are not collaborative or who don’t pull their weight.
• High-performing team member. A team incentive can be a problem for high performers if they think that folks who are not pulling their weight are getting a bonus because of the high performers’ work.
• New team member. How do you treat a new employee who joins the team part way through the incentive period?

In tomorrow’s Advisor, Busch on team incentives, plus an introduction to the unique guide for smaller—or even one-person—HR departments.