Incentive Plan Design

Well designed incentive plans encourage employees to concentrate on their key objectives by rewarding them for performance against these objectives.

Clearly, well designed incentive plans also help employers to recruit and retain competent employees, and enable these employees to gain recognition when they are performing well.

Unfortunately not all incentive plans are well designed, or are properly integrated into the total benefits package. Anyone who reads the financial press will be only too well aware of non-executive directors and senior executives who have been much better rewarded for inflicting significant damage on their company than they would for achieving success.

The effect that this has on other employees can only be imagined.

The 10 Principles of Incentive Plan Design

RSG follows ten principles in designing incentive plans.

1. We work with the client to determine the field of employee performance that he wishes to reward. (It must be something that the employee can influence.)

2. We advise on an appropriate quantitative measure of this performance.

3. We help determine the slope of this reward. What should be paid for “standard” and what for “exceptional” performance? Should there be a cap on the reward?

4. We help decide over what period performance should be measured. Should there be an element of smoothing in this measurement?

5. We help decide whether the incentive programme should be based on team performance or individual performance. (If you want a group to work as a team, then rewarding the group members for individual performance may actually break this down.)

6. We check with the employer to ensure that the costs of the incentive plan are proportionate to the benefit to the business.

7. We work to ensure that the plan is easy to administer.

8. We help to ensure that the managers of the business understand and support the plan. (You need them on side or the plan will fail.)

9. We help the employer to work out how he is going to communicate the plan. If employees cannot understand how a plan works and what it rewards, then it is not going to influence their behaviour. Shortly put, it is a waste of money.

10. We build in a process to review the plan over time. Circumstances change, and if a plan is not varied to recognise these changes, it may lose all credibility with employees.

Some employers think that incentive plans are restricted to the big end of town; but the fact is that there are many different ways to recognise superior performance; not all of them financial. RSG has introduced a number of plans that do not rely on a cash reward for their effectiveness.