Incentive compensation can be a great way for an organization to incent employees to work to the best of their individual abilities and to work together collaboratively. Both of these in place greatly enhance an organization’s likelihood of achieving or exceeding its objectives.
However, as LoDico’s Law #2 states, “There are lots of wrong ways to do something that’s right or good.” This certainly applies to incentive compensation plans.
The most common mistakes that organizations make that in turn diminish the value and impact of an incentive compensation plan are:
1) The potential rewards are insufficient to cause employees to be appropriately motivated to strive enthusiastically toward achieving the necessary performance levels to trigger reward payments.
- If you fail to avoid this mistake, it does not matter if you avoid the other mistakes.
2) The plan is too complex.
- It needs to be designed and communicated in such a way that participants can easily grasp how it works.
3) The metrics upon which rewards are based are outside the control or influence of participants.
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- In compensation terms, this refers to the “line of sight”. In simple terms, it means that employees need to clearly see how their roles impact the outcomes upon which they will be rewarded.
- The harder it is for them to see the connection between their work and the rewards, the less is the effectiveness of the plan to accomplish what is stated in this blog’s first paragraph.
4) The goals are perceived as too difficult to achieve.
- The goals should strike a balance between being challenging and being achievable.
5) There is insufficient communication to participants as to the actual performance goals in comparison to the performance levels needed for rewards to be given.
- To use a sports analogy, at any given time, the players need to be able to look to the scoreboard to see if they are winning or not.