Segal Company

Incentive Plan Design

Given the recent economic developments, many organizations are seeking ways to get away from the entitlement mentality and instead look for the best use of their limited funds to drive performance. As the salary increases have shrunk or were frozen for most organizations, incentives have quickly become the most powerful tool to differentiate employees, drive performance, and establish line-of-sight within the organization. Our experience indicates that the shift to a pay for performance culture not only helps to attract and engage employees but that it also ensures the retention of high performers.

incentive plan design

Working together with clients, Sibson develops client-tested incentive plans that reduce the mentality of entitlement and ensure that the employees focus on activities that support the agreed upon business objectives. Our approach is always specifically designed to establish the desired pay for performance alignment for our clients.

Among many different market-tested design alternatives, Sibson helps organizations identify, develop, and implement the incentive type that is the best fit for the organization given their strategy, goals, and operating environment. Some of the incentive plan types we develop for our clients include:

  • Profit sharing plans give employees a direct and open sense of ownership in the profits of the company. Size of the incentives is based on the level of profits and each employee receives a percentage of the profits based on a preset distribution formula. As the size of the incentive pool is directly linked to the profits, these plans provide a strong linkage between award levels and business performance.
  • Gain sharing plans are designed to improve productivity, increase efficiencies, or save costs through employee involvement. The incentive payments are funded by the achieved gains and are allocated to employees using a predetermined sharing formula. Gain sharing plans increase the organizational focus and help involve employees in process development and cost reduction efforts.
  • Individual incentives are designed to reward employees for their improved commitment and performance at an individual level. Typically, goals reflect participant's specific responsibilities and payouts are based on the evaluation of the individual's performance relative to the preset goals. As the participant often perceives the goals as controllable, individual incentive plans provide a clear line of sight and will have a high impact on employee behavior.
  • Group incentives are designed to reward effective teamwork and the plan payout is dependent on the performance of the team/group as a whole. Goals reflect the specific responsibilities for the group and payouts are based on an assessment of the group's performance relative to preset goals. Group incentives encourage teamwork and provide a clear line of sight for the members of the group.
  • Spot awards are often used to recognize individuals/groups for exceeding the performance expectations or completing a project or program. Payouts are non-periodic and are not based on preset criteria. Spot awards help reinforce a performance culture and address non-recurring accomplishments that are not covered by typical incentive plans.
  • Combination Plans. Each incentive plan has certain strengths and limitations in terms of engaging individuals or providing a link to overall business results. Sibson often designs customized incentive plans that help improve line of sight and establish a strong linkage to overall performance.

Common Issues:

  • What incentive types are appropriate for my organization? Is a blended approach perhaps more appropriate?
  • How far into the organization should eligibility go?
  • How much differentiation and opportunity should the plan provide?
  • How should the total incentive amount be determined – incentive pools, self-funding, discretionary, blended?
  • How is the incentive award calculated?
  • What is the right incentive amount given the availability of funds?
  • What performance criteria are used to measure performance?
  • How often should the measurement and payout occur?
  • How is the incentive plan and employee pay mix positioned relative to the competition?

Our approach for driving performance is typically based on three main building blocks:

Design incentive plans that are aligned with your organization: Sibson's approach for incentive design is tailored for your business strategy, realities, and compensation practices. We determine the best approach after understanding your organization, nature of your jobs, and the lines of sight these jobs have. We identify the factors that would best motivate the right behavior and bring the desired results. This approach helps our clients develop meaningful incentive plans that are fully aligned with all other compensation strategy and total reward elements.

Adapt market best practices: While we focus on your internal context, our suggested solutions also consider market trends, competitive pay levels, and industry best practices. Our extensive experience in designing performance driven incentive plans feed our solutions, resulting in well rounded, market tested outcomes.

Conduct in-depth quantitative analysis: Our solutions are supported by in-depth quantitative analytics, which minimize implementation surprises. Our typical approach to incentive plan design includes detailed financial modeling to determine results and cost of the incentive plan for various performance scenarios based on both actual historical results and projected performance scenarios.

We carefully examine the job roles, the target pay levels, and the targeted pay mix, answer these key questions to help you establish incentive mechanics, and measures specific to your organization and business units that drive performance and balance the needs of all key stakeholders.