What an Effective Incentive Compensation Plan Might Look Like
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What an Effective Incentive Compensation Plan Might Look Like

Making sure your incentive compensation plan encourages the behavior you want

For most employers, retaining key employees and managing their performance are important priorities. A well-designed incentive compensation plan can give you a lever to affect both behaviors. The emphasis, though, is on “well designed.” An incentive compensation plan can create three kinds of change – positive, negative, and none – only one of which is desirable.

Here are some points to remember if you’re thinking about installing an incentive compensation plan, or changing the one you already have in place. A plan should:

  • Reflect company strategy. Is your main corporate aim boosting shortterm sales? Or is it increasing the capital value of the company over time? On another level, are you targeting a small market of high-value customers, or a mass market of smaller customers? Asking questions like these will sharpen the picture of the behavior you want to encourage.
  • Be timely. Long-term incentives work best for retaining employees, while short-term ones work better for tactical performance goals. Remember: Incentives that are deferred for too long lose their luster.
  • Avoid unintended consequences. Are you incenting behavior that will rebound on you? For example, are your incentives stoking sales to customers who will pay late?
  • Keep a balance with base salary. If the incentive is too high compared with salary, employees tend to become less manageable for their supervisors.

Notice that we haven’t tried to prescribe what form the incentive should take. Your decision to pay in cash, benefits, stock, or some other form will depend on your circumstances. That said, cash has always been, and remains, a potent short-term motivator.

Source: Steptoe & Johnson, LLC.

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