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The Basics of Incentive Plans

By: Chris Carlson


Companies in all industries and sizes are looking at all aspects of their operations, human capital and how they pay their workforce. Based on recent discussions, breakout sessions and client / candidate questions, incentive plans remains to be a hot topic. Variable pay is the most frequently brought up topic.

When thinking about variable pay, here are some things to consider.

Variable Pay: Incentive for performance assumptions

  • Some people perform better and are more productive than others
  • Better performing employees should receive more compensation
  • Part of compensation should be tied directly to performance and results
  • Some jobs contribute more to organizational success than others

Performance recognition in any form has positive effects.

  • Increases sales
  • Enhances customer service
  • Encourages employee team work
  • Increases employee morale
  • Enhances employee loyalty / retention
  • Improves safety / attendance

I think we would all agree that our organizations and teams could improve in these areas. When is the last time you really looked at your incentive pay plan? Are you rewarding performance that aligns with your mission statement?

There are three types of individual variable pay programs that address different challenges.

Production Performance Variable Pay Plans

  • Actual change vs. planned changes
  • Revenue growth
  • Return on Investment
  • Average employee productivity change

Sales Programs

  • Increase in market share
  • Customer acquisition rate
  • Growth of existing customer sales
  • Customer satisfaction

HR Related Program Measures

  • Employee satisfaction
  • Turnover costs
  • Absenteeism cost
  • Worker?s comp claims
  • Accident rates

There are many pros and cons to incentive pay plans. The necessary conditions for a successful individual incentive plan are based on clear, concise communication. You must identify the desired performance, level of competitiveness, and align the organizational culture / mission.

Source: 2008 Thompson / South-Western