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Putting Your Variable Pay Dollars to Work

July 21, 2017
Employee Variable Pay Strategy

Does your company offer a program of incentive plans to reward employees for meeting performance goals? If so, you have clearly taken a progressive approach to keeping employees engaged and motivated to deliver better bottom-line results. At least that’s the goal, right? But do you really know if your employee incentive plans are working? Are you confident that, as currently structured, your incentive program nurtures a win-win environment for your business and employees? If you’re not sure what makes an incentive program successful, your plans could be ineffective or might even threaten your profitability. Here’s how to help make sure your incentive program actually motivates and rewards employee performance:

1. Consider the Big Picture

Your employee performance incentive program will likely influence your business at three levels: corporate, sales and departmental. Because sales and departmental performance roll up into the overall corporate impact, incentives at those levels must be well designed and productive. So, with those three levels in mind, let’s dig deeper.
To evaluate your incentive program and its success, you should analyze it from four perspectives:

  • Personal performance — Is the program encouraging and producing the desired employee behaviors and results?
  • Financial — How is the program affecting the bottom line, and what are its costs?
  • Differentiation — Are your top performers also your top incentive earners?
  • Communications — Do employees really understand how to make money in the plan?

2. Judge the Personal Performance Success of Your Incentive Program

Often, the introduction of an incentive program can spark improved employee productivity. Unfortunately, this excitement and energy, as demonstrated by improved personal performance, can be short-lived. Continuing communications to remind employees of their incentives, benchmarks and progress in meeting performance goals can certainly help keep them motivated. To make sure this happens:

  • Measure employee productivity before, during and after incentive program cycles. Did the plan drive the desired behaviors? Analyze (or simply observe) performance at various times to make sure.
  • If your plan has management by objectives (MBOs), analyze incremental and individual results to determine if these objectives were set too low or too high. Remember that unreachable objectives can be de-motivators.
  • Hold employee focus groups to find out what they think is (or is not) working; and if the incentive program meets their needs and expectations.
  • Develop an annual process to review and update plans.

3. Judge the Financial Success of Your Incentive Program

Behavior, attitudes and productivity all affect the bottom line. To make sure your employee incentive program helps boost financial performance and profitability:

  • Measure financial performance before, during and after incentive program cycles. Based on the numbers, can you clearly see whether your incentive program is delivering the expected ROI? Keep in mind that many factors can affect short-term financial performance, including market factors beyond your control. So, don’t make knee-jerk changes to your plan unless those changes are clearly necessary to correct a plan deficiency.
  • Zero in on key financial performance metrics. How did your program pay relative to sales or earnings? Did your company have low performance earnings yet pay high on incentive plan results? If the macro view of reward-to-performance ratio seems off, consider making changes to the program.
  • Look at results by department. Are individual team payouts in alignment with the performance of larger organizational units? If this micro view of reward to performance indicates problem areas, make sure that any overall program changes benefit the company as a whole.
  • Compare your incentive program payouts to other companies in your market. If your plan is far below those of key competitors, you could lose top performers.

As an example, a not-for-profit organization thought that incentives were not offered in its industry. It had a complete compensation study performed on both base pay and incentives. Its market study results provided the information needed to get the board to approve incentive plans for all employees — from the top all the way to the bottom.

4. Judge the Differentiation Success of Your Incentive Program

Does your employee incentive plan actually differentiate and reward your top performers? If everyone seems to get a bonus regardless of performance, your plan could be a de-motivator to your superstars. To make sure your incentive program rewards excellence:

  • Analyze how many employees earned below target, at target and above target.
  • Based on this, determine if the targets were realistic. A good rule of thumb is that 10% to 20% should be rewarded at the top level, 60% to 80% should be rewarded less, and 10% to 20% should be rewarded considerably less (or nothing) for subpar performance.

5. Communicate the Plan

How well do you communicate your plan? Do your employees know how to make money in your plan?

  • Be sure to communicate the incentive plan both verbally and in writing. Determine if the verbal communication is best delivered via a webinar, by a manager or in a group setting
  • Have someone who has not been involved in the plan design read through the documentation for understandability as well as clean and concise language.
  • Frequently communicate progress toward results, especially if it looks like the plan is not going to result in a payout.

As an example, many companies will communicate results toward key performance metrics monthly or quarterly as well as let employees know when the plan will pay and the size of the payout. This is especially important for profit-sharing plans. A medical devices company started communicating with its employees’ midyear when it became evident that the numbers needed to pay the annual profit-sharing that year were likely not going to be met. The expectations were set far in advance that no profit-sharing payment was occurring that year, and then employees were not surprised at year end when no payments were received.

The Bottom Line

Employee performance incentive programs can be complicated. Designed, implemented and administered correctly, they can inspire performance excellence, company loyalty and healthier corporate profitability. Poorly crafted plans, however, can lead to discouragement, dissention and costly employee turnover.

About the Author

Cassandra Faurote, CCP, is president of Total Reward Solutions, a McCordsville, Ind.-based consulting business.

This article was first published in World at Work: Compensation Focus.
View source here.

Posted Under: Incentive Compensation