Incentive Compensation Tips

With incentives you will get what you pay for, so make sure that what you ask for is really what you want. Before you start:

• Proceed with caution – get design help and/or run the numbers under various scenarios . Effective incentive design is not always intuitive, and incentives can be both powerful and destructive – i.e. Constructive in a skilled users hands, but very dangerous when badly designed, misapplied or misused.
• Before you start, be very clear on your company’s strategic intent and the critical measures of its desired success.
• Manage incentive plan risk by balancing ‘production push’ with ‘drivers of quality’ (on time, on cost, on quality).

The following key incentive design principles have been learned from years of designing incentive plans at all levels in many different industries and types of companies. These principles can be applied to any and all types of incentive plans:

1. Incentives must be affordable – well designed plans pay for themselves out of the marginal increase. Answer question of why owners would want to offer incentives …
2. Incentive Potentials must be large enough to get employee’s attention.
3. Performance required to earn incentives must be within employee’s control (or significant ability to influence outcomes).
4. Required performance must be perceived as meaningful but achievable (have stretch).
5. Payout must be perceived as worth the effort required to “stretch”. .. i.e. should pay something for partial achievement of desired outcomes. Many plans fail because have “cliffs” where any achievement below objective pays nothing.
6. Incentive payout should never be a surprise (an incentive is not a bonus) – sources of performance tracking readily and frequently available … calculations simple, clear and commonly understood.

We hope these tips and guidelines help you refine your incentive plan designs. As we can assist further in any way (with getting the right people, in the right places, doing the right things), please do not hesitate to let us know. All the Best!