Incentive Plan Design
Given recent economic developments, many organizations are seeking ways to get away from an entitlement mentality and better use their limited funds to drive performance. As salary increases have shrunk or been frozen for most organizations, incentives have quickly become the most powerful tool to differentiate employees, drive performance and establish a clear link between performance and rewards within the organization. Our experience indicates that the shift to a pay-for-performance culture not only helps to attract and engage employees, but this culture also ensures the retention of high performers.
Common issues our clients face:
- What incentive types are appropriate for my organization? Is a blended approach 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 measurement and payout occur?
- How is the incentive plan and employee pay mix positioned relative to the competition?
Working together with clients, Sibson develops client-tested incentive plans that reduce the mentality of entitlement and ensure that employees focus on activities that support the organization's agreed-upon business objectives. Our approach is always specifically designed to establish the desired pay-for-performance alignment for our clients.
After considering many different market-tested design alternatives, Sibson helps organizations identify, develop and implement the incentive type that is the best fit given their strategy, goals and operating environment. Some of the incentive plan types we develop for our clients include:
- Profit sharing plans: These plans give employees a direct and open sense of ownership in the profits of the company. The size of incentives is based on the level of profits, and each employee receives a percentage of the profits based on a preset distribution formula. Because the size of the incentive pool is directly linked to profits, these plans provide a strong link between award levels and business performance.
- Gain sharing plans: These plans are designed to improve productivity, increase efficiencies or save costs through employee involvement. Incentive payments are funded by 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: These plans are designed to reward employees for their improved commitment and performance at an individual level. Typically, goals reflect participants’ specific responsibilities, and payouts are based on an evaluation of the individual's performance relative to preset goals. Because participants often perceive the goals as controllable, individual incentive plans provide a clear link between pay and performance and will have a high impact on employee behavior.
- Group incentives: These incentives are designed to reward effective teamwork so that the plan payout is dependent on the performance of a 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 these preset goals. Group incentives encourage teamwork and provide a clear link between pay and performance for the members of the group.
- Spot awards: These awards are often used to recognize individuals/groups for exceeding 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 reward 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 establish a strong link betweeen pay and overall performance.
Our approach for driving performance is typically based on three main building blocks:
- Designing incentive plans that are aligned with your organization: Sibson's approach for incentive design is tailored to your business strategy, realities and compensation practices. We determine the best approach after understanding your organization, the nature of your jobs and the link between pay and performance that these jobs currently 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.
- Adapting 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 feeds our solutions, resulting in well-rounded, market-tested outcomes.
- Conducting in-depth quantitative analysis: Our solutions are supported by in-depth quantitative analytics that minimize implementation surprises. Our typical approach to incentive plan design includes detailed financial modeling to determine the results and the cost of the incentive plan for various performance scenarios based on actual historical results and projected performance scenarios.
We carefully examine job roles, target pay levels and targeted pay mix, and then answer 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.