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Paying Incentives - Do You Need To?

Aug 17, 2007
When clients ask about pay issues, quite often they jump straight to paying "bonuses" to reward performance. Let's start off with some definitions we use.

Firstly, we feel strongly that any base salary review should have a significant focus on performance. If this is done properly the need for further incentives or "performance pay" is often removed.

Secondly, part of the definition of bonus in the English Oxford Dictionary is "over and above that which is normally expected". We see this as a discretionary payment which a business may give to employees. There is no real contractual obligation to do this. Employees may see this as "cream on the top" but often are not sure what to do to make sure they get it again.

We see incentives differently. This is a payment that will be made if certain actions are taken or targets achieved. It is a contractual obligation.

While bonuses in some businesses, usually small, private companies, can work, there are some downsides. They are usually provided without clear targets being set and they often lead to expectations that they will continue regardless of performance. Sometimes they can make the "giver" feel good but have little impact on employees' performance.

On the other hand, they can build a strong culture within a business when the boss is seen to share some of the gains without any prior agreement to do so.

Incentives are far more focused and for this newsletter we will discuss a few guidelines to assist in implementing a plan that works.

The first step is to decide what you are trying to achieve. If it is something employees aren't doing, but should be, will a financial incentive change their behaviour? Is there some other reason why they are not doing what they should be? If you are clear on what you want them to do and think an incentive will help, try asking employees what they think about the idea.

If you have decided that an incentive is the way forward - to either maintain good performance or encourage even further effort - then you need to make sure the measures you have in place align with your business objectives.

Don't set targets based on volume if your focus is on quality. A recent story about an airline that provided a fuel saving incentive for pilots is alleged to have compromised their supposed goal of increased safety.

Participants in an incentive program should have some control over what is being measured. It is not much good providing an incentive for sales if someone has no influence on sales at all.

The targets must be challenging, otherwise there is not much point in having a plan, but achievable. Where the targets are never achieved people will lose interest. Where they happen too easily it will be expected each time without any extra effort being expended.

The amount paid must be meaningful - too little won't make the difference you want. A percentage of salary is usually best to have a similar affect on each participant. Non-financial incentives such as trips may have a different appeal for individual employees.

It should encourage high performers to stay with the Company. It should be rewarding with the chance of it being even more rewarding in the future. Long-term incentive plans can be designed to achieve this more easily than short-term plans.

Often a combination of these plans can achieve the desired result as just a focus on short term profit can deter investment in longer term plans that will bring future benefits.

Participants must be able to understand the measures and what they have to do to earn an incentive. It is no good having a complicated formula that no one understands.

It should be clearly communicated in writing so there are no disagreements as to when it will be paid, how much and under what circumstances.

There should be a review process at regular intervals to determine if the plan is delivering the results you need.

If these guidelines are followed you stand a greater chance of success than if you approach setting targets and offering incentives in an ad hoc way. You will also be able to avoid much of the friction that badly planned programs often cause.

If an incentive plan is designed correctly and implemented properly it can reinforce the key objectives of the business, support the culture you want and have a significant affect on the performance and profitability.
About the Author
Paul Phillips is a Director of Horizon Management Group; a specialist human resource management consulting firm. He has over 30 years experience in HR and, while based in Australia, has worked in a number of overseas locations. www.horizonmg.com
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