YEAR-END: REVIEW YOUR COMPENSATION PRACTICES, PART 3

In any organization’s discussion of it, there are inevitably questions that arise about incentive compensation:

1. Do incentive plans impact employee behavior in a positive manner?
2. If so, what are the essentials of a short-term incentive plan (STIP)?
3. Should we also have a long‐term incentive plan (LTIP), and if for which employee groups?
4. What type of long‐term plan is best?
5. If I implement a plan, how will I know it’s been successful?

Let’s take a quick look at the 1st two of these important questions

1) Do incentive plans impact employee behavior in a positive manner?

• A 2017 study reported in the Human Resources Management Journal states:
  Incentive pay and variable pay has become increasingly important for  motivating employees to perform productively at work. It represents one of the key elements of HRM systems aimed at achieving sustainable competitive success for an organization.”
• Additional research shows that a key factor in determining how impactful incentive pay is depends on whether the incentive plan is utilized to force changes in behavior or to reinforce behavior.

2) If so, what are the essentials of a short-term incentive plan (STIP)?

• They include the following:
  1. Identify the performance objectives you want to achieve, including a financial objective but also 2 to 3 non-financial ones
  2. Translate the objectives into Key Performance Indicators (KPIs) that are measurable & achievable, but yet stretch employees in order for achievement
  3. Establish the rewards associated with various levels of achievement
     The rewards must result in meaningful dollars.
     A common mistake is to fail to include rewards for achievement level above 100% or to undervalue the rewards for extraordinary performance.

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  4. Ensure KPIs are ones that employees can impact (called “line of sight”)
  5. Clearly communicate the plan
  6. Regularly update all participants on the status of actual performance in comparison to objectives, reinforcing the related rewards

1. Determine the right balance between guaranteed compensation (base pay) & variable compensation (incentive/bonus/commission compensation), including answering such questions as:
   If not all employees, which employee groups’ compensation should include a variable portion?
   Which employees/groups who are part of a short-term incentive plan should also participate in a long-term incentive plan?
2. Identify certain performance objectives it wants to achieve & the outcomes that will result if the objectives are attained.
3. Translate those objectives into Key Performance Indicators (KPIs)
4. Establish its rewards for KPI achievement at varying degrees of success

For more information:

• E-mail Trinity at info@TrintyHR.net
• Visit our website at www.TrinityHR.net
• Call us at 856.905.1762 or toll free at 877.228.6310

HOW TRINITY CAN HELP:

Trinity’s Team has extensive experience in custom designing highly effective incentive compensation plans, along with a relevant, results-driven performance management system.

You have OPPORTUNITIES…Trinity HAS PATHS FORWARD!