Incentive compensation can be a powerful tool for driving performance and motivating employees. But let's be honest - we've all seen incentive plans that totally miss the mark. You know, those complicated schemes that nobody understands and don't seem to inspire anybody to do anything differently. Or the unlimited upside plans that encourage bad behavior and crazy risk-taking in pursuit of ever-higher payouts.
When designed and implemented properly though, a strategically crafted incentive comp plan can turbocharge your organization's success. So what separates the good plans from the bad? What characteristics define a truly motivational, fair and effective incentive compensation program? Here are some key ingredients:
Alignment with Goals
First and foremost, your incentive plan needs to directly incentivize the performance you want to see. The measures, metrics and rewards need to be tightly aligned with your core goals and objectives as a company. Otherwise, you risk incentivizing behavior that actively works against your key priorities. The plan should be carefully designed to promote the right actions.
Easy to Understand
Even the most well-designed incentive plan won't work if your employees don't understand it. You need a model that is simple and transparent enough for everyone to grasp how it works and what they need to do to earn payouts. When people feel like the plan is a complicated black box, they'll quickly become apathetic toward it. Clear understanding breeds engagement.
Achievable Yet Motivating
Your incentive plan targets need to strike the right balance between realistic and aggressive. If the goals seem totally out of reach, people will feel deterred from even trying. But if they're too easy to hit, where's the motivation? Effective plans have a gradient of target goals that take real effort to achieve, while keeping the highest upside payouts within the realm of possibility for top performers.
Credible and Consistent
For incentive plans to drive behavior, people have to truly believe they'll get paid for earned payouts. If the organization has a track record of not following through or constantly making adjustments that limit payouts, the plan quickly loses all motivating power. Companies with the best programs follow standardized, transparent protocols and remain consistent year-over-year.
Individualized fairness
While the incentive plan structure itself needs to be universal and consistent, the specific mechanics should account for differences in roles and individual contributions. Top plans have flexibility baked in with different goal curves and performance multipliers based on job duties, levels of experience, and unique workloads. This individualized fairness makes people feel like they have true ownership over their compensation.
Robust Communication & Tools
Even with all the other characteristics nailed, an incentive plan will underwhelm if employees don't have visibility into their performance. Best-in-class programs invest in intuitive apps, dashboards and individualized reporting so people always know exactly how they're tracking toward goals. They pair the technology with responsive administrators who can answer questions and make continual adjustments.
The old-school thought process around incentive compensation plans was to keep them mysterious and complicated to prevent workarounds. Modern thinking is the opposite - you want to demystify incentives as much as possible and create a human-centric program. When compensation plans check all the boxes above with clear alignment, achievability, fairness, consistency and transparency, that's when they become highly motivating forces for employees at all levels of an organization. The best incentive plans turn compensation from an overlooked numbers game into a crucial part of your company's culture.
