Design of an incentive plan for employees

Employee incentive programs are a very powerful concept when the employee can understand and see the connection between their performance and their rewards. A great plan will transform the business from average performance, where people come to work just to do their job and get paid, to one where excellence and outstanding results are the goals and staff are properly motivated to maintain those goals.

The following are some key fundamentals in any successful incentive plan:

KISS – Keep it simple and special. Good plans are easy to implement and follow. Employees need to know what they can do to earn an incentive and what exactly that incentive will be. If your plan involves tracking a large number of detailed performance indicators, you’ll waste management time and confuse employees. Consider the overall performance results: were sales up or down? Is customer retention staying high? Is productivity increasing or decreasing?

Reward only for exceeding business targets: Incentive plans should be activated only after average performance is exceeded. This means that management must have clear goals and expectations. Employees need to have a clear understanding of what the expected average performance is and what actions they can take to help the company exceed core business goals and thus earn an incentive.

A target goal might be to increase productivity by 10% during the year. Next, CSRs need to understand that they will need to drive 10% or more in commissions at the end of the year in order to earn an incentive. If the service staff does not increase productivity, then there is no reward.

Reward great individual effort – see employees doing something right and make sure everyone in the office sees that management recognizes you. If a CSR did a great job handling a difficult account, shower it with immediate praise, recognition, and a reward. There is no need for any analytical performance tracking for this incentive plan. This way, staff will know that management appreciates the extra effort they put in. This is one aspect of the first layer of employee incentives.

Foster Team Results – For service staff and administrative employees, there needs to be a fair amount of teamwork in a successful business. In an effective plan, performance results are also tracked and rewarded based on unit or department results. Tracking individual performance can be difficult, so this is a good compromise between rewarding great individual effort (see above) and great overall business results (such as total sales growth).

Notable Rewards – A good rule of thumb is that the total value of incentive rewards an employee can earn should be around 8% to 12% of their base compensation. Nothing below 8% will appreciate. This does not mean that the employee must earn incentives of 8% or more, but rather that they can earn up to that amount.

Be creative: Today’s employee is looking for rewards other than money. They are looking for challenges, recognition and empowerment. Non-monetary recognition awards are a very effective way to reinforce company values. They can be a low-cost, high-impact element of the total compensation package. For example, employees who provide exceptional or innovative customer service receive special awards. One way is for employees to be nominated by customers, insurance company employees, or their peers as the top performers of the month or quarter.

Management needs to think about the types of rewards that make sense for employees. Here are some examples:

– Offer a day off with pay.

– Provide tickets for sporting, musical or cultural events.

– Take out an ad in the local newspaper thanking your employees for their contributions

– Provide a donation on behalf of an employee to the charity of their choice.

– Pay the tutoring of the winner’s son

– Have the winner’s car detailed during the job.

– Pay for the cleaning of the employee’s house

– Pay for a night out for the winner and their spouse – dinner and childcare

– Pay for a “pampering day” especially for the ladies like a day at the spa with massages, pedicures, manicures, etc.

– Allow the best workers to have flexible hours for their work schedule, such as four ten-hour days. Maybe they can work outside their home once a week.

Long-term incentives: A good plan will allow employees to earn monthly or quarterly incentives. A great plan will add a long-term rewards system as the third layer of incentives. Think of long-term incentives like golden handcuffs. If an employee accumulates a nice little war chest, he’ll think twice before leaving the company for a small pay raise if he has to forego his long-term incentive compensation.

Probably the easiest plan would be to create a deferred compensation plan based on profit sharing. Make sure it’s a non-qualified plan to keep it simple. Each year, the employee will earn a certain amount of compensation based on the profitability of the business. This can be booked on a separate account for tracking purposes. Payment of this long-term incentive compensation is deferred until a few years later or until the employee’s retirement.

A more exotic approach is the use of phantom shares and stock appreciation rights, which create a reward based on the value of the company’s shares. Again, the employee cannot access this deferred compensation for several years or until retirement. In some cases, it might make sense to actually provide key, long-term employees with real equity capital in the company.

Keep in mind that human nature is such that long-term rewards are often forgotten or dismissed by employees unless they are presented with regular reminders. Also, this kind of approach doesn’t usually directly tie individual effort to rewards, but for the purpose of golden wives, that’s usually fine.

a final thought

A good principle to follow is that if you want outstanding results, you must be prepared to pay outstanding rewards. Implementing a creative employee incentive plan will motivate employees to improve not only their own performance but also the performance of the company.