Incentive compensation

An asset for employee motivation

What is incentive compensation?

Definition of incentive compensation

The objective of incentive compensation is to incentivise individual and/or collective performance, and to recognise and reward this performance. Its aim is to motivate staff - i.e., to encourage employees to target their actions and adapt their behaviours in order to produce the level of qualitative and/or quantitative performance expected by the company.

Fixed Salary

Within the various components of an employee’s overall compensation, fixed salary is awarded in recognition of the job definition achievement. It takes into account the level of responsibility, execution of key skills and the employee’s experience levels. Its purpose is, therefore, to reward the three key components of an employee’s skillset: expertise, know-how and behaviour.

Other types of compensation

Companies may also make use other kinds of compensation measures, which must be validated within the overall package.

While these additional components of global package may evolve over time, they are not considered as “incentive ”. In fact, incentive compensation must always carry some requirement in terms of performance - in particular, individual performance.

Fringe benefits, profit sharing, stock options and free shares may all vary from one period to another for a company employee. However, these do not have the same motivational impact on team members, as their function depends more on recognition of a contribution to an overall result, or being part of a certain business category, than the incentive to achieve a result or requirement set by the company.

Two conditions for effectiveness: variability and reversibility

The motivational nature of incentive compensation resides less in the level of challenge issued to the staff member (i.e. the bonus being sought for a given objective), and more in a combination of two conditions: the risk of losing and the perspective of earning a lot.

As a result, incentive levels can revert to 0 if the employee’s performance is far below the level expected. At the same time, a maximum bonus must also be attainable for a performance that significantly surpasses expectations.

Incentive is therefore variable based on performance, but also reversible - which means that, at the beginning of each performance cycles, all employees are once again in a position to achieve their bonus. The feeling among some team members that their bonus is guaranteed, or among others that they are locked out of the bonus scheme, are both pitfalls which can cause the company to miss out on achieving the best possible collective performance.

In order to enable variation and reversibility, the rate of incentive compensation must not be excessive. In practice, it has been observed that beyond an average rate of 30 - 40% of global package, the proportion of variable income becomes impossible to vary (on both a managerial and social level). Conversely, the objective set must be sufficiently significant to ensure that the employee is motivated by this component of their global pay. The level below which behaviour tends to be more opportunistic than voluntarist is around 8 - 10%, roughly equivalent to a month of fixed salary.

 

What is the purpose of incentive compensation?

Incentive compensation aims to foster motivation, but it is not the only tool that can increase performance. The role of managers is essential, as are marketing tools and other elements. Moreover, a poorly-conceived incentive strategy can actually have negative effects on motivation levels.

In order to understand the impact of incentive compensation on motivation, we must examine the full range of stages in an employee’s motivational journey.

EN_wheel_motiv_400x400

 

1. Realistic objectives in order to avoid demotivation from the get-go


2. Proportionate effort: carefully adjusting the effort/reward balance


3. A balanced set of objectives to allow for variable and reversible compensation


4. Results that meet a clearly-defined objective


5. Value levels in accordance with the beneficiary’s expectations

 

When drawing up our variable compensation plans, the company issues a performance requirement to which a compensation scheme is attached.

The employee’s first instinct will be to assess the feasibility of the challenge they’ve been set, and whether it seems fair. There’s no point in asking a casual jogger to take the starting line at a marathon.

An employee will measure the efforts they need to produce in order to meet their objectives in terms of risk/reward. If the potential outcome is sufficiently attractive, they will want to get in the race, and above all will be incentivised to sustain their effort levels in order to obtain the best possible result.

In addition, the employee will be highly attentive to the intermediary and final results they achieve, in order to systematically verify their accuracy. 

Finally, during last step in the motivation cycle, they will verify that the value of the compensation acquired in return for the performance delivered meets with expectations.

Throughout each one of these steps, any dysfunction in the system or a simple technical mistake can cause employees to fall out of sync with the motivation cycle. They may even produce the opposite effect to those initially sought, which is why it is so important to apply a meticulous approach when building bonus schemes.

 

How should bonus schemes be deployed?

Establishing an incentive scheme in alignment with the overall company strategy

How to gain height? Start by asking the right questions, without trying to sprint straight for the finish line, but instead translating the company’s strategy or key objectives into a specifications’ document gathering the effects that your bonus schemes will need to produce.

Should we incentivise staff to aim for a single financial result, or should incentives focus on the way this goal is achieved? How far should you up the stakes - i.e. how do you manage selectivity and differentiation within the bonus scheme? What level of budget flexibility is acceptable? These are just some of the structural questions that need to be answered in order to construct a incentive scheme that can be shared by the entire company.

Understanding and Anticipating Pitfalls

After 25 years spent avoiding the pitfalls of incentive compensation - with the help of our clients - here we present a list of the various “syndromes” that we’ve observed:

How do you stop your motivation scheme leaving you high and dry?

the-rowing-boat-syndrome

A poor incentive system soon leaves some people feeling that they are pulling hard for others. In other words, some people don’t put in any effort at all but take advantage of a system that’s drifted off course .At the end of the journey, there are those who see themselves as galley slaves and those who "don’t deserve to win" but win anyway.

Our solutions are designed to combat these demotivating outcomes, making sure that everyone pulls in the same direction without feeling that they are going against the flow.

How can you increase your chances of winning – and your teams’ chances?

the-lottery-syndrome

Devising a incentive plan can’t just be “left to chance”.

It has to be based on robust, straightforward principles, as well as dependable, tried-and-tested
mathematical methods.

Our scientific approach is a major contributing factor to our clients’ success.

How do you make a ball and chain into a cannonball?

the-ball-and-chain-syndrome

The difference between a good and a bad system of incentive compensation can be summed up in two words:

  • Assessment
  • Evolution

Evaluations of your expectations, as well as the resources and motivational effects produced by your bonus schemes; and continuous evolution of your systems in order to ensure your incentive compensation strategy remains in alignment with your company strategy.

How can we streamline and prioritize the performance criteria being evaluated for incentive compensation?

the-millefeuille-syndrome

Did you know? The traditional French mille-feuilles dessert contains 2 048 layers of pastry.

Now, try to imagine how many different bonuses are involved in your incentive schemes, in addition to the rules and modifications that get added bit by bit over the course of the years.

In reality, you expect a lot from your employees, but only the most essential objectives deserve inclusion in your incentive scheme. Streamlining your bonus schemes will help improve clarity, and will help avoid your employees “choosing” their bonus.

How can you give your plans consistency, while at the same time keep them light and simple?

the-mayonnaise-syndrome

What applies to mayonnaise can also be applied to variable pay plans.There’s nothing easier when it turns out well and nothing more complicated when it goes wrong.

Although our systems are complex, they have one simple goal: to be easy to use and understand.
In short, they will be a perfect accompaniment to your incentive plans and will whet your appetite for more!

How can you avoid a spread of efforts and motivations?

the-dandelion-syndrome

When we define a bonus scale, the notion of performance spread is a central preoccupation in terms of sharing out bonuses between your employees and staying within budget.

During our presentations, we stress the importance of this spread in order to allow our clients’ ambitions to soar.

How can you stop your budget from freefalling?

the-parachutist-syndrome

How many incentive budgets have proven to be poorly assessed, and ended up costing more than initially planned for?

At Primeum, we’re committed on a level of accuracy that guarantees you'll hit your budget targets with a less than 3% margin of error. This will prevent you and your teams coming back to earth with a bump.

How you can take your teams to a new level if your performance driver is not the right one ?

the-pole-vaulter-syndrome

If all you needed was a six-metre bar to perform a six-metre high jump, everyone would be a world champion.

At Primeum, we believe in our Commitment Process, which determines solid and ambitious objectives with reciprocal commitments from each of your employees. Just ask our clients - they’ll tell you how their sales results have soared.

How can you avoid a slip-up on a simple miscalculation?

the-soap-syndrome

All it takes is one bad budget estimate and very quickly your motivation plan can slip out of control.

It becomes demotivating and dangerous, you lose your grip and work yourself up into a right lather.

Companies that have been through this and taken a bath always listen carefully when we show them our modelling tools.

How can I be sure that my variable pay schemes will bear fruit?

the-stork-syndrome

At Primeum, we have organised ourselves so that every project to restructure and deploy variable pay schemes comes together on schedule. Our methodologies, schedule management, but also the guarantee of continuity of those involved will allow you to succeed in developing your bonus schemes by transforming them in an “happy event”.

Help us in the upstream phase by identifying the best internal sponsors and decision makers, and you’ll see how the positive changes we bring about continue to multiply and bear fruit over time.

How can you make sure that everyone is on board with your incentive scheme ?

the-spider-syndrome

Incentive systems are often designed with the company’s interests in mind, and not in terms of motivating the teams they are actually aimed at. In order to avoid this phenomenon, we have made 3 commitments:

  • studying the profiles of your teams and your management
  • implementing solutions that motivate the many, not just the few
  • integrating the concept of collective results without undermining individual motivation

Once this is accomplished, believe us - the level of involvement will enable your teams to “ fly in the sky” !

How do you bring the information home?

the-E.T.-syndrome

An incentive scheme has to be shared - especially with the people it’s supposed to be motivating! Our presentation tool is here to help. This tool provides information about the bonus plan to the beneficiary in real time. This way, the employee knows where they stand and where they need to get to. They can consult this information anywhere, using their computer, tablet or smartphone.

Motivation is sustained and effort encouraged. This isn’t from outer space – it’s just common sense.

If you’re lost, how can you know which direction to take?

the-compass-syndrome

If you’re on board a ship without any landmarks, it’s difficult to know if you’ve blown off course. A good navigator sets his course and knows how to follow it - but needs the right tools to do it! At Primeum, we’ve designed steering tools for your variable compensation plans so that our clients always know where they are - and where they’re going.

This allows them to plan ahead for the journey and avoid being blown off course.

 

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