Articles

The Key Features of a Good Incentive Plan

By Alex Tanglao, Updated: 2023-12-10 (published on 2023-08-30)

Incentive plans are becoming an increasingly popular tool to drive employee performance. A well-designed plan can accelerate business growth and achieve talent attraction and retention.

The more and better the employee works, the faster the business grows

What are the characteristics of the best incentive compensation plans?

Incentive compensation plans aim to align the interests of employees and the organisation, motivating staff to achieve key business goals and rewarding them for their contributions.

Following these guidelines is the best way to have an incentive compensation plan.

Have a clear and specific incentive plan

A good incentive plan should be clear, specific and easy to understand.

First, employees need to have an unobstructed view of the plan and its objectives to reinforce behaviours that will lead to desired business outcomes.

Such a plan also makes it easy to administer with minimal errors, and this also helps to develop system credibility.

Create an agile incentive plan design

In today’s economic climate, competition is the norm, and businesses must continually evolve to stay relevant and innovative.

Likewise, whether you offer share options, cash bonuses, or other incentives, a good plan must be agile enough to adapt quickly to changes while remaining effective as a performance driver.

Companies should use compensation benchmarking tools and rely on up-to-date data to create salary structures and stay competitive in the market. 

In Singapore, the Smart Nation initiative has massive bearings on measuring and quantifying performance.

Technology has allowed for the automation of many functions in the workplace, and businesses need to rethink their KPIs.

For example, administrative assistants may no longer be required to process and track department claims and instead be expected to take on a more analytical role in producing meaningful dashboard reports.

Attractive and attainable incentive plans

A good incentive plan must be attractive enough to motivate employee performance and attainable with stretched efforts so that employees will not be discouraged.

As a rule of thumb, the average achievement level should be set as the target, and 20% above that could be a stretch goal with upside earnings.

The company can also decide if it wants to take an all-or-nothing approach or consider multiple incentives for various performance levels.

Have measurable results in your incentive plan

In incentive compensation, what gets measured gets managed—and ultimately rewarded.

Having quantifiable metrics ensures that employees understand the goals they’re striving for and allows for a transparent, fair evaluation of performance. 

Key elements of measurable metrics:

  1. Specificity: Clearly define what is being measured. Whether it’s sales numbers, customer satisfaction ratings, or project completion times, the metric must be specific enough that there’s no room for ambiguity.
  2. Benchmarking: Establishing a baseline for each metric provides context and allows for more precise goal-setting. This could be based on historical performance, industry averages, or targeted business outcomes.
  3. Timelines: Deadlines create a sense of urgency and focus. Attach timeframes to each metric—monthly, quarterly, or annually—to create specific targets that employees can work toward.
  4. Real-Time Tracking: Utilise technology to give employees real-time performance feedback. This encourages consistent effort and allows course corrections before the evaluation period closes.
  5. Multi-Dimensional Metrics: In many cases, looking at a single metric doesn’t give a complete picture. For example, a salesperson could have high revenue numbers but poor customer satisfaction rates. Employ a balanced scorecard approach to avoid incentivising the wrong behaviour.
  6. Level Playing Field: Ensure that the metrics apply equally to all participants in the incentive program, accounting for variables such as job role, geographic location, or market conditions that could skew results.
  7. Data Integrity: Data used to measure performance should be accurate, reliable, and validated. Incorrect data can lead to unjust rewards or penalties, undermining trust in the system.
  8. Scalability: As the company grows or changes, the metrics should be easy to update or modify to ensure that the incentive plan remains aligned with the evolving objectives of the business.
  9. Transparency: Make the metrics and how they are measured transparent to all participants. This creates a sense of fairness and allows employees to take ownership of their performance.
  10. Alignment with Business Goals: Lastly, and most importantly, ensure that the metrics align with the organisation’s broader objectives. This ensures that the employees’ incentives directly contribute to the company’s success.

Incorporating measurable metrics into your incentive compensation plan provides a roadmap for employees, guiding them toward the behaviours and outcomes that are most beneficial for the organisation.

It replaces subjectivity with objectivity, enables precise performance tracking, and makes the allocation of rewards transparent and fair. By focusing on meaningful and measurable metrics, companies can create a potent tool for motivating employees and driving business success.

Make sure the incentive plan is legally compliant

Incentive compensation plans don’t operate in a vacuum. They’re subject to various federal, state, and even international laws and regulations.

Ensuring compliance is a legal necessity and critical for maintaining employee trust and avoiding costly lawsuits or penalties.

  1. Labour Laws: Each jurisdiction may have specific laws governing how incentives and bonuses can be awarded. For example, some regions may require that any financial bonuses be included in overtime calculations.
  2. Tax Implications: The employer and employee will likely have tax obligations tied to any financial incentives. Understanding these tax implications upfront is crucial to avoid unexpected financial consequences for both parties.
  3. Non-Discrimination: Laws such as the U.S. Equal Employment Opportunity Act prohibit discrimination based on age, race, sex, religion, and other characteristics. Incentive plans must be carefully structured to ensure they don’t inadvertently favour one group over another.
  4. Disclosure Requirements: Particularly for publicly traded companies, there may be disclosure requirements related to executive compensation extending to incentive plans.
  5. Data Privacy: If your incentive plan incorporates tracking metrics that involve personal or sensitive employee data, compliance with data protection regulations like GDPR in the European Union or CCPA in California is crucial.
  6. Financial Reporting: Some incentives, like stock options, have specific financial reporting requirements that must be disclosed in financial statements according to accounting standards like GAAP or IFRS.
  7. Contractual Obligations: Always review any existing employment contracts, collective bargaining agreements, or other legal documents that could affect the structuring of your incentive plan.
  8. Local and International Laws: If your company operates in multiple jurisdictions, it’s essential to understand and comply with local laws and possibly even international treaties affecting employment and compensation. Employer of record services will save you the hassles of international legal compliance, payroll, benefits, and other challenges
  9. Regular Audits: Implement a regular review process for your incentive plans to ensure ongoing compliance, especially in light of ever-changing regulations.
  10. Legal Counsel: Given the complexity of laws governing employee compensation, consulting with legal experts in employment law is highly advisable when designing or revising your incentive plan.

By paying careful attention to legal compliance, businesses can mitigate risk, avoid costly legal battles, and create an incentive plan that’s fair, transparent and stands up to scrutiny.

This not only safeguards the company but also builds trust among employees, who can rest assured that their incentives are both rewarding and legally sound.

Ensure timely rewards for your incentive plan

The concept of timeliness in an incentive compensation plan serves as a psychological reinforcement mechanism, greatly enhancing its overall effectiveness.

Immediate rewards often influence human behaviour, creating a clear and quick link between action and outcome.

When employees see a direct correlation between their efforts and the rewards they receive, they are more likely to be motivated to perform at higher levels.

Key elements of timeliness:

  1. Quick Payouts: Financial rewards like bonuses or commissions should be disbursed as soon after achieving the goal as possible. Delays in payout can disrupt the psychological link between performance and reward, diminishing the incentive for future effort.
  2. Immediate Recognition: Non-financial rewards like verbal praise, certificates, or small tokens of appreciation should be given almost immediately after the accomplishment. This instant gratification encourages a culture of excellence and keeps motivation high.
  3. Scheduled Reviews: While long-term incentives are essential, incorporating shorter review cycles for performance can make the plan more dynamic. Quarterly or monthly reviews and corresponding rewards can keep employees engaged year-round.
  4. Real-Time Tracking: Modern software tools can provide real-time performance metrics accessible to employees. Knowing where they stand in real-time can be an ongoing, immediate incentive.
  5. Clarity in Timing: Employees should know exactly when to expect their rewards. Whether it’s a monthly bonus or an annual stock option grant, the timing should be transparent and reliable. Uncertainty about when rewards will be given can lead to scepticism and decreased effort.

By ensuring that the rewards are timely, an incentive compensation plan can capitalise on the principles of immediate reinforcement, instilling a performance-oriented culture.

This is particularly effective for objectives that require consistent and ongoing effort, as it maintains a continuous loop of motivation and reward that drives individuals to meet and exceed their targets.

Consider non-monetary incentives

Incentives do not necessarily have to be monetary. When building a successful incentive plan, businesses must identify the form of compensation that will be the most effective.

Without generous budgets, businesses can offer non-monetary incentives such as paid time off, awards, and recognitions as performance drivers.

Unlike most people think, incentive plans do not have to be expensive!

Tags: business | legal | Singapore | SME

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