Design of an incentive plan for employees

November 4, 2021 by No Comments

Employee incentive programs are a very powerful concept when the employee can understand and see the connection between their performance and their rewards. A great plan will transform the business from an average performance, where people come to work to do their jobs and get paid, to one where excellence and outstanding results are the goals and staff are properly motivated to maintain those goals.

The following are some key fundamentals in any successful incentive plan:

KISS: make it simple and special. Good plans are easy to implement and follow. Employees need to know what they can do to get an incentive and what exactly that incentive will be. If the plan involves tracking a large number of detailed performance indicators, it will waste management time and confuse employees. Look at the big picture performance results: did sales increase or decrease? Is customer retention high? Does productivity increase or decrease?

Reward only for exceeding business goals – Incentive plans should be applied only after average performance is exceeded. This means that management must have clear goals and expectations. Employees must have a clear understanding of what the expected average performance is and what actions they can take to help the company exceed core business goals and thereby gain an incentive.

One goal could be to increase productivity by 10% during the year. Then CSRs need to understand that they will need to handle 10% or more commissions before the end of the year in order to earn an incentive. If the service staff does not increase productivity, then there is no reward.

Reward great individual effort – See employees doing something right, and make sure everyone in the office sees that management recognizes you. If a CSR did a great job handling a difficult account, fill it with immediate praise, recognition, and reward. There is no need for any analytical performance tracking for this incentive plan. This way, staff will know that management appreciates the extra effort they put in. This is one aspect of the first layer of employee incentives.

Drive Team Results – For service personnel and clerical employees, there must be a fair amount of teamwork in a successful business. In an effective plan, performance results are also monitored and rewarded based on unit or department results. Tracking individual performance can be difficult, so this is a good compromise between rewarding great individual effort (see above) and excellent overall business results (such as overall sales growth).

Notable Rewards – A good rule of thumb is that the total value of incentive rewards an employee can earn should be between 8% and 12% of their base compensation. Nothing below 8% will be valued. This does not mean that the employee should earn incentives of 8% or more, but rather that they can earn up to that amount.

Get Creative – Today’s employee looks beyond money for other rewards. They seek challenge, recognition, and empowerment. Non-cash recognition awards are a very effective way to reinforce company values. They can be a low-cost, high-impact element of the total compensation package. For example, employees who provide outstanding or innovative customer service receive special awards. One way is for customers, insurance company employees, or their peers to nominate employees as the best performer for the month or quarter.

Management must think about the types of rewards that make sense to employees. Here are some examples:

– Provide a paid day off

– Provide tickets for sporting, musical or cultural events.

– Put an ad in the local newspaper thanking your employees for their contributions

– Provide a donation on behalf of an employee to the charity of their choice.

– Pay for the tutoring of the winner’s son.

– Have the winner’s car detailed during work.

– Pay for the cleaning of the employee’s house

– Pay for a night out for the winner and their spouse: dinner and babysitting

– Pay for a “pampering day” especially for women, such as a day at the spa with massages, pedicures, manicures, etc.

– Allowing top performing workers to have flexible hours for their work schedule, such as four 10-hour days. They may be able to work outside the home once a week.

Long-term incentives: A good plan will allow employees to earn monthly or quarterly incentives. A great plan will add a long-term rewards system as the third layer of incentives. Think of long-term incentives as golden handcuffs. If an employee racks up a nice little war chest, they’ll think twice about leaving the company for a small pay raise if they have to forfeit their long-term incentive compensation.

Probably the easiest plan would be to create a deferred compensation plan based on profit sharing. Make sure it’s a non-qualified plan to keep it simple. Each year, the employee will earn a certain amount of compensation based on business profitability. This can be reserved in a separate account for tracking purposes. Payment of this long-term incentive compensation is deferred until a few years later or until the employee’s retirement.

A more exotic approach is the use of phantom stocks and stock appreciation rights, which create a reward based on the value of the company’s stock. Again, the employee cannot access this deferred compensation for several years or until retirement. In some cases, it might make sense to provide key, long-term employees with the real equity capital of the company.

Keep in mind that it is human nature that employees often forget or dismiss rewards in the long run, unless they are presented with regular reminders. Also, this type of approach generally doesn’t directly link individual effort to rewards, but for the purpose of the golden handcuffs, that’s generally fine.

A final thought

A good principle to follow is that if you want outstanding results, you must be prepared to pay outstanding rewards. Implementing a creative employee incentive plan will motivate employees to improve not only their own performance, but also the performance of the company.

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