ASSET-BASED HR HOT BUTTON
Design an incentive
plan that works
A well conceived incentive plan can motivate employees and
achieve desired results. By Dr Mark Bussin and Elmien Smit
H
ow to design effective incentive schemes
still eludes many organisations. Employee
incentive plans go by many different
names and you’ve undoubtedly seen your
share. But, with many economies struggling, how
should you approach your employee incentive plans
differently to reach your organisations goals? Or, can
an employee incentive plan actually create the results
you need?
First let’s look at the bigger remuneration
picture and where exactly incentives fit in. At the
start we have the base salary component – that
guaranteed income which is for the complexity of
work performed. Next is the benefit package that
takes care of the health, wealth and needs of the
employees. Perquisites aid in our ability to perform
best at the job and effectively. Short-term incentives
(bonuses, incentives and commission) rewards
what happened last year and long-term incentives
are for retention and shareholder alignment. For
the purposes of this article, mainly bonuses and
incentives are focused on.
There is growing distinction between the definitions
of bonuses versus incentives. Bonuses can be
defined as award after something good happens,
but was not promised in advance in most situations.
An incentive is a payment that is promised in
advance in a performance period and in return for a
specific objectively performance measure.
Therefore the components of Total Remuneration
are illustrated in the figure below.
Components of Total Remuneration:
Bonuses grab the attention of employees but do not
motivate them for a long time period. In our view,
bonuses have a place in the remuneration mix, but
the company should not spend a great amount of
money on bonuses because they do not motivate
like incentives. They are safe but not influential.
Individual incentive plans are designed to
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reward employees for their improved commitment
and performance at an individual level. Typically,
goals reflect participants’ specific responsibilities,
and payouts are based on an evaluation of the
individual's performance relative to present goals.
Because participants often perceive the goals as
controllable, individual incentive plans provide a clear
link between pay and performance and will have
a high impact on employee behaviour. Based on
the article Test your Incentive Plans against these
Guidelines, Timothy O’Rourke and Matthews Young
describe some very interesting guidelines which are
worth repeating.
Guideline #1 The potential incentive must be
big enough to get the employees’ attention. We
know that well designed incentives make most
employees focus. Good employees already work
hard, but hard working employees who are not
focused often work against the results the company
seeks. Incentives create focus. But you have to get
employees’ attention first.
Guideline #2 The performance or results
required to earn the incentive must be within the
employees’ control or significant influence. This one
guideline has led to the failure or success of more
incentive plans than any other guideline. One must
be able to see or understand the cause and effect
relationship between one’s effort, the results of
that effort and the reward. The need to provide the
proper “line of sight” between output and rewards at
all levels of the company may require a large number
of different incentive plans to cover all employees
under incentives. The administrative requirements
then become burdensome, and we have seen
diminishing returns from an effort to cover an everincreasing number of levels in the company. On the
other hand, we have seen successful applications
of different mixes of remuneration components for
different levels of the company.
Guideline #3 The performance or results
required to earn the incentive must be perceived as
achievable with “stretch.” If I told you that I would
give you a million dollars at the end of the next year, I
would probably get your attention. Your first question
HOT BUTTON ASSET-BASED HR
would be, “What do I have to do to get it?" Then,
if I told you that you would need to get yourself to
Mars and back by the end of next year, I would lose
your attention. No matter how good the promised
reward, the employee must believe that the desired
performance is achievable. Of course, Guideline #2
described above has a great deal to do with the
employee’s perception of the ability to achieve the
desired outcome.
We have also found that the objective must be
perceived to require a stretch. If I told you that you
could earn that million-dollar incentive if the paint
on the walls of an empty storage room remained
the same colour all year, you would probably focus
on the objective for a while. However, after some
time, you might begin to doubt that I would really
pay you for such a meaningless objective. Then you
would get bored with the effort and realise that, if
I were not lying to you, the objective was too easy
to achieve and you would stop watching the walls.
The incentivised performance needs to be perceived
as a desirable, stretch goal to get and keep the
employee’s attention.
Guideline #4 The payout must be worth the
effort required to “stretch”. This guideline suggests
that the Plan should pay something for partial
achievement of the desired outcome. Not only must
the potential incentive be big enough to get the
employees’ attention, but also it must be perceived
to be worth the effort. If the effort or focus required
to get the full incentive opportunity requires stretch,
in other words it’s seriously at-risk, then the actual
payout after the final measurement is made needs
to justify the attempt that was made to achieve the
full objective. Many plans fail because they have
a “cliff” where any level of achievement below the
objective pays nothing. “Cliffs” encourage employees
to do anything to achieve the last few units of
measurement. If they are close to achieving the
stretch objectives, they might do something you do
not want to happen to get over the cliff. One CEO
with a cliff plan lamented that he was afraid the
employees would sell the furniture at year-end to
achieve a tough revenue objective.
Guideline #5 The payout should never be a
surprise.This assumption often differentiates an
incentive from a bonus as defined at the beginning
of this article. If the payout cannot be forecast as
the performance period proceeds, the Plan will
fail to keep the employees’ focus on the desired
outcome. Furthermore, the first time that the desired
outcome is achieved, and the employer fails to pay
the incentive, the motivational power of the Plan is
lost forever.
Guideline #6 The sources of performance
tracking must be readily and frequently available. In
order for the Plan to avoid surprises, the Plan must
pay for the achievement of objective measures of
the desired outcomes. Too much subjectivity in the
measurements will turn a Plan into a surprise bonus.
Furthermore, the participants in the Plan need to
know where they stand at all times.
Therefore, the sources of the measurements
should be available to every participant on a regular
basis.
Guideline #7 Calculations for determining
payouts must be simple and clearly understood
The “KISS” guideline applies to incentive plans
as much as in any endeavour, if not more so.
The key question to ask is, “Do my employees
know where they stand at any point in time during
the performance period?” In order to keep the
employees focused, they need to know where,
precisely, they stand and how much they are leaving
on the table. This guideline argues against formulas
that create curvilinear payouts and plans that use
more than a few measures of success.
Guideline #8 Finally, you will get what you pay
for, so be sure it is what you really want. Incentive
plans are powerful forms of remuneration. Welldesigned plans focus employees much more than
any other component of reward systems. Many a
management team has driven their company in the
wrong direction because they rewarded the wrong
outcomes. Before you even consider incentives,
make sure you know the company’s strategy and the
critical measurements of success.
In conclusion, these guidelines are basic enough to
be applied to any and all types of incentives, shortterm, long- term, cash and “non-cash,” current and
deferred, management and staff. Applying these
guidelines will aid in motivating employees and
achieving desired results and most of all creating a
fair, unbiased, and trust-focused culture.
Please remember that incentive schemes are not
a substitute for good management. Common sense
needs to be applied and employees need to be led.
There is no substitute for great leadership.
Dr Mark Bussin is the Chairperson and Elmien
Smit is a Professional Assistant at 21st Century Pay
Solutions Group, www.21century.co.za.
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