Motivating workers is critical to corporate success. Organizations across the country are seeking to continuously improve employee performance, while simultaneously controlling costs. Establishing or expanding incentive compensation programs can be an effective strategy to achieve this objective.

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M
otivating workers is critical to corporate success.
Organizations across the country are seeking to
continuously improve employee performance, while
simultaneously controlling costs. Establishing or expanding
incentive compensation programs can be an effective
strategy to achieve this objective.
When designed well, incentive plans align employee
behaviors and activities with specific goals. When
designed poorly, incentive plans can cause confusion and
frustration among employees and dissatisfaction among
owners and management. There are several practices
to be avoided and others to be considered in order to
design an incentive plan that succeeds in motivating and
recognizing desired performance.
Don’t: Use corporate performance measures that do not
apply to the industry or organizational operations.
Do: Focus on metrics that are meaningful to
organizational strategies.
Organizations at different stages of development
are likely to have different goals and, thus, different
performance measures that should be included in incentive
plans. For example, a start-up company is generally focused
on gaining customers and growing sales. As a result,
increases in market share and revenue growth are likely
to be appropriate measures to incorporate into incentive
plans. Conversely, mature companies often have reached
maximum market penetration and revenues have stabilized.
These companies therefore should emphasize profitability
and cost controls.
Don’t: Wait until the end of the period to determine
performance measures and corresponding payouts.
Do: Establish and communicate incentive plan criteria
before the performance period begins.
For budgeting purposes it is financially responsible
to estimate potential incentive payouts prior to the
performance period. Furthermore, employees are likely to
respond much more positively to the plan if there is clear
understanding as to what results are needed to earn the
incentive.
Don’t: Overemphasize corporate financial performance
measures.
Do: Adjust the relative weighting of corporate and
individual performance based on job levels.
While including corporate performance as an element
of the incentive plan encourages employees to have a
more holistic perspective, considering “line of sight” is
imperative. If employees cannot influence the incentive
plan’s performance measures, the ability to earn incentives
is beyond their control. This means the plan will be largely
unsuccessful at motivating employees. At lower levels of
the organization individual or team performance measures
should compose the majority of the plan’s criteria.
Don’t: Award incentives indiscriminately across staff.
Do: Determine eligibility based on line of sight, market
prevalence and job level.
Many employers believe in rewarding all staff when
organizational performance is strong; however, this is one of
the most common ways of fostering feelings of entitlement
and misunderstanding among staff. Additionally, there is
compliance risk if incentives for non-exempt employees
are not calculated correctly. The ideal way to determine
eligibility for an incentive plan is to identify employees
who can impact the performance measures and those
for whom incentives are a market-competitive practice.
Corporate initiatives to improve worker performance and
motivation are nothing new. However, such endeav-ors have
taken on greater significance as companies focus on
enhancing organizational results in the midst of uncertain
economic times. A key objective of incentive compensation
is to encourage and reward desirable employee
performance and behaviors. As a result, any incentive plan
that does not illicit improvement falls short of overall plan
goals. Incentive compensation plans should be developed
conscientiously, keeping the basic “DOs and DON’Ts”
in mind, and continuously reviewed for effectiveness.
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Human Resources
DOs & DON’Ts of Short-Term Incentive Compensation Plans
Article reprinted from Summer 2013GROWTHBIZS T R A T E G I E S
PRIYA J. KAPILA
CBIZ Human Capital Services • St. Louis, MO
314.995.5558 • pkapila@cbiz.com