Incentive compensation programs are primarily used to promote efficiency and productivity of the workforce, but organizations can also use them to enhance employee recruitment, engagement, retention and employer branding.
Although revenue-based incentive compensation is most common in B2B Performance Incentive Plans, Incentive compensation plans can be divided into two types:
- Pay for performance
- Independent of performance
Incentive compensation plans are depending on the type of economics of the organization.
Pay for performance
Incentive compensation plans are all about rewarding outstanding employees through pay for performance. In this type of plans, employees are rewarded for positive results. For the purposes of Performance incentives, they are generally used as a part of a long-term incentive compensation plan. There are two types of pay for performance.
- Base Pay for Performance
- Discretionary Pay for Performance
Base Pay for Performance
In an increasing number of companies, base pay increases whether employee’s performance under direct supervision is adequate or below the target level. The figures below illustrate the average base salary raises for salaried, hourly, and exempt employees based on type of job and pay raise in the US.
Discretionary Pay for Performance
Discretionary bonus creates an incentive for a person to do their job well. Organizations use discretionary bonus plans to recognize and reward the performance of employees. These plans are about rewarding the people whose performance is considered by decision makers as exceptional in either financial or non-financial terms.
Independent of Performance
Companies using the independent incentive plan may expect to be paid even if their performance does not measure up. The UK profit share was also introduced into quite a few executive incentive compensation plans.
In some instances, executive rewards have become quite complex. Sometimes, executive incentives in addition to the cash bonus plan to increase positive motivation of members of the management team. Other times, incentive compensation plans are used in stock options.
The target compensation class among most executives is one-year. However, one-year performance is not relevant for many executives earning their annual salaries, bonuses, and long-term performance incentives.
To conclude, the two main types of incentive compensation plans are on the basis of
- Pay for performance
- Independent of performance
Pay for Performance Company Examples
A major US bank used a designed performance incentive system for newly-recruited managers, according to which, the employees were trained ad implemented a performance bonus plan based on salary. Performance incentive programs were implemented in a different way for each of the more than 80 different job types. Once the individual bonus amount was added to the salary base, the faculty members were compensated and they were expected to make any achievement in the future.
During the year, the announcement on the performance of the employee is made and it is possible to change relations with other advisors and different employees in the bonus structure.
The incentive system arrives in the form of a single award, which is typically cash or stock. The jury system may vary from one year to 12 months, as well as the employee performance targets.
The award can be made to the employee for an increase in revenue, a decrease in the loss, or outstanding performance of another employee.
In this example, short-term incentive compensation was used to build a long-term plan. In this case, the targeted compensation program was considered as a reward for exceptional performance rather than a way to buy behavior.
The industrial relationship of a company was instead of the employees and the plan would not affect the present base. Employees with performance of less than average received no incentive compensation in any way.
The purpose was to communicate to the team that the collective behavior would generate individual bonuses to support the business strategy.
The emphasis was on long-term profit and management considered the incentive compensation plan as a way to motivate employees to focus on day-to-day activities and try to be as productive as possible.
The planning committee planned to reward performance achievements. The performance was measured on the basis of the financial performance of individuals in comparison to the goals.
The process for deciding the individual bonus was as follows:
First, the committee developed the bonus plan and the plan was discussed with the Executive Committee of the Board of the Company. The process was made by the staff, who decided on the amount of the award, which was given to the recipient. After examining the decisions, the committee can not decide on the award. The next level of executives may be informed that there is a difference in the decision. The next level of executives can also reserve the award for a limited amount. In this case, the staff determines whether the recipient reported to the Executive Committee. The final decision on the award is made by the Executive Committee. If the staff believes that the committee does not agree on the amount of the award, it is possible to change that value.
Performance Incentive Plan Detail
The basic clauses that are shared by these incentives are the following:
The reward is a part of an executive’s regular compensation.
The performance incentive is connected to the performance of the executive.
Performance incentives are most effective if they are perceived as one part of the overall compensation of an employee.
The performance incentive compensation is linked directly to the results of the executive as part of the incentive plan.
The performance incentive plan is one of the primary components of the overall compensation of an executive.
“Soft” for Non-Financial Rewards
The occurrence of the “soft” for non-financial rewards was not a frequent issue in most companies. In some models, organizations faced the following issues:
These rewards are earned by the recipient on the basis of the completion of the task. At present, it is not possible to place a scale on the work that has been done.
The aim of the “soft rewards” is to change the behavior, performance or attitude of an individual and not to increase the productivity.
The “soft rewards” are less expensive than financial rewards. In addition, these benefits are not part of the total compensation package.
Therefore, they are often regarded as part of the process of recognition .
Performance incentives have gained popularity among public and private businesses in the last few decades. Especially in the last few years, it has emerged as a strongly viable option for organizations because of their application in several ways.
For example, it is increasingly fashionable in the education sector to implement performance incentives as a part of the overall compensation package for the teachers. Good performance in the classroom can be linked to end-of-year student appraisal results.
In the healthcare sector, it is particularly valuable because patients are increasingly demanding improved treatment and hospitals are competing for a major part of the market.
When performance incentives are used in HR management, it works well if people who benefit most from the change are part of it. The need for performance incentives in the company can be motivated if you ask the employees to share the company’s goals. The work teams must be aware of performance incentives.
General terms and conditions are important when designing performance incentives. For individual employees, goals must be specific and measurable, as well as the performance and reward process. To avoid the perception of rewards as a bribe, the criteria for the choice of awards must be clear. While performance incentives are relatively inexpensive, they can lead to unexpected results. Creating a good compensation program can help increase the motivation of employees.