How to Design an Effective Incentive Plan for Your Team

Motivate staff and improve retention by designing an effective incentive plan. Expert advice to ensure you get buy-in, value, and results.

Incentive or bonus programs (cash or other rewards that encourage performance above and beyond what is expected) can be powerful motivators for staff. They’re an important component of compensation and, done correctly, a great way for management to promote desired behaviours and drive results. 

While the benefits of incentive programs may be easy to understand, designing and administering them can be challenging. How should they be structured and communicated for maximum impact? How can desired traits be quantified? Who should be involved in the process? 

To get answers, we spoke with two credible sources: 

Judy Slutsky, Human Resources expert

Henry Goldbeck, President of Goldbeck Recruiting 

“People are going to go where they’re incentivized to go,” says Goldbeck. In a competitive labour market, Goldbeck believes that all aspects of compensation are key tools in both recruiting and retention. As such, compensation plans should not be overlooked.

Slutsky’s work in HR has often involved helping clients craft effective incentive programs. She believes that clear expectations drive increased motivation. 

“Incentive programs allow employees to progress in their jobs based on moving the bar forward,” she says. “The incentives describe what the performance standards are. It’s a very important engagement and retention tool in the long term.”  

Maximize Impact by Quantifying Desired Behaviours

Incentive plans are perhaps most closely associated with sales positions, and for good reason. 

“The sales process typically has defined activities and steps (i.e a sales funnel),” says Slutsky. “In other jobs it’s harder to understand the steps to be successful in the role and when you have achieved each of them.”

Goldbeck believes that it’s a mistake for companies to limit incentives to the sales department. 

“It works for everybody,” he says. “You can tailor your incentives to whatever is important for your organization.”

KPIs and Quantification

In order to properly reward employee performance, it’s necessary to measure it. Job descriptions tend to speak in terms of main job responsibilities, qualifications, skills required in the position but often do not articulate the expected outcome in measurable or definable terms. Quantifying performance can present a challenge, particularly in non-sales roles. Slutsky urges organizations to consider crafting the success measures or desired outcomes for all positions so that staff can fully understand what it takes to be successful in the role.

“For every main job responsibility, you can ask yourself what the expected outcome of each job duty or a set of duties is,” she says. “For recruitment quantitative success measures could include the number of candidates interviewed per vacant role, number of short-listed candidates, number of employment offers made.  Whereas qualitative measures for hired staff might include “retention, efficiency or staff performance”.

Certain jobs’ roles can be more difficult than others when it comes to clearly quantifying KPIs. Goldbeck recommends assessing performance of these types of roles in employee reviews in a way that they understand as they’re working, day to day. Rewarding the performance of these types of roles can be documented in a series of subjective assessments of the employee’s contribution, benchmarked against the department or function.

Slutsky cites several competencies to look out for when assessing performance of these roles:

·      Collaboration with multiple departments in order to reach resolution and problem solving.

·      Using critical thinking in order to analyze a problem and its root causes. 

·      Time management and the ability to create schedules and timelines and to meet deadlines. 

·      Entrepreneurial thinking and decision-making based on theoretical concepts instead of business savvy. 

Get Buy-In by Making Your Incentives Attainable

Your staff won’t be motivated by incentive plans unless they find them realistic, credible, and attainable. 

“Employees aren’t stupid,” says Slutsky. “If they see your incentive plan as bogus or unachievable, it can actually be a deterrent.” 

In Goldbeck’s experience the best bonus programs have low floors and no ceilings.

“Employees need transparency they can trust when it comes to bonuses,” adds Goldbeck. “As I’ve said, they should start getting bonuses when they meet 75% of their target, that’s motivation! The programs should also be uncapped. Employers really have to look at the purpose of incentives — it is for retention.” 

Goldbeck warns about the repercussions felt by companies who cap incentive payouts. 

“If overperformance occurs and the company reduces commission, that person will start looking for a new job that very same day,” he cautions. “It will be seen as theft and you will lose somebody who overperforms.” 

Bonus programs that are tied to overall company performances can be seen as a red flag, particularly if they’re tied to murky metrics or if the goalposts move seemingly without reason. 

“If the company doesn’t perform as expected, I’ll never get my bonus. That’s how employees think,” explains Slutsky. “This will impact negotiations and they’ll want a higher base salary.”

Companies with credible programs, on the other hand, can expect to be rewarded. 

“One of my clients always pays out everything they said they would,” says Slutsky. “They have next to zero employee turnover. Many employees have left and come back.” 

“I’ve gotten calls from salespeople who feel like they’ve been cheated out of a bonus due to employers raising targets year on year, wanting to send me their resume!” says Goldbeck. 

“Employers have to want to pay bonuses when they create these incentive plans.” Goldbeck continues. “If companies are in a position where they are having to give out bonuses based on performance of their employees, that means the company is taking in enough money to make a profit while doing so.” 

Improve Incentive Program Design by Seeking Input from Various Departments

The details of a cash bonus or incentive program have implications throughout the company. It’s important that all departments are involved in the design. 

Finance: “The most attractive incentive programs use cash/bonuses as an incentive and start with your Finance Department or personnel determining the total allocation of money that can be paid out in an incentive program ,” says Slutsky. “Identify how much your company can afford to incentivize employees over the next 12 months without compromising operations”.

Executives: Executives are tasked with deciding how that available pool of bonus money will be split between departments and employees.  These decisions might be based on company objectives, needs, goals, labour or competitive market conditions and overall business strategy. 

Human Resources: The HR department is the best positioned to determine performance expectations and behaviours that should be incentivized. This is done in consultation and feedback from staff who perform in those roles.

Employees: Seek employee feedback in incentive programs in order to maximize success. The true merit of an incentive plan is the degree to which it motivates employees. Employee Buy-in is essential. For this reason, feedback from all employees throughout the company can be useful. 

Stay On Strategy by Adjusting Your Incentives Annually

It only makes sense that your bonus program should incentivize the behaviours and actions that best serve the company at present. As market conditions and other variables change so, too, will company objectives. For this reason, it’s beneficial to revisit your plan on an annual basis. 

“New targets should be set each year,” advises Goldbeck. “They can pertain to new business, existing business, or new or different product lines. One of your objectives may be improving customer satisfaction ratings. Another could involve developing a market where it might take years to get a financial payback.”

According to Slutsky, the Covid-19 pandemic serves as a great example of a paradigm shift that necessitated a rethinking of incentive plans. 

“During COVID all Sales programs had to change, so progressive organizations changed their incentives, but they didn’t get rid of them,” she says. “They focused on other things. They had to rebuild their brand, find new customers, or sell online vs. in store. It’s like that with market conditions every year.” 

Goldbeck concurs. “Some of your targets may decrease if there’s some restructuring or something significant happening in the economy,” he says. “If the company is doing really well, or if the individual is in a lucrative niche for the company, the target can be reset.” 

Slutsky believes that companies must thoroughly analyze their business before making decisions. 

“You really have to look at the current market,” she says. “What are the business growth opportunities? How can this group of staff capitalize on these opportunities?” 

Company Performance Incentives a Red Flag

Bonus programs that are tied to overall company performances can be seen as a red flag, particularly if they’re tied to murky metrics or if the goalposts move seemingly without reason. 

“If the company doesn’t perform as expected and bonus goalposts are always moving, I’ll never get my bonus. That’s how employees think,” explains Slutsky. “This scenario would likely impact employee total rewards negotiations and they’ll ask for a higher base salary if they suspect the bonus won’t be paid out on a regular basis”.

Companies with credible programs, on the other hand, can expect to be rewarded. 

“One of my clients always pays out all bonuses they promise at the outset of the year and employees perform to achieve those bonuses” says Slutsky. “They have next to zero employee turnover. Some of those employees have left the company and then come back to work years later.” 

The notion that if a company pays out a bonus on a regular basis, the employee will come to expect it and consider the bonus a regular part of their compensation. 

To that Slutsky says “Companies who think this way should revisit and enhance their incentive programs so that the benchmarks for success are realistic and achievable”.

Ensure Clarity by Putting Your Incentive Program in Writing

“It’s important to have your incentive program articulated in the employee agreement so that people know in advance what their incentives are,” says Slutsky. 

When updates are made to the program, Slutsky says it’s sufficient to provide a written document, as opposed to an updated employee agreement. 

“The key thing is to have it in writing so that the employee knows at the beginning of the year what’s expected of them,” she says. 

“The frequency of bonus distribution is also important to note in writing,” says Goldbeck. “Quarterly bonuses are a great way to motivate employees year-round as opposed to an annual bonus, which are tougher.”

Scorecards Provide Motivation

Dashboards, scorecards, or other forms of updates will help everybody keep their eye on the ball. 

“Don’t just wait 12 months and say ‘are we tracking this?’” advises Slutsky. 

Instead, provide frequent updates. Not only will this serve to motivate staff, but it will also provide clarity. Be creative. 

“Many companies don’t bother putting this together, because it’s laborious and time consuming, especially if you haven’t articulated the key performance indicators,” says Slutsky. “If you know what’s expected on a monthly basis, or semi-annual basis, write it down and sit with the employee.” 

Ultimately, an incentive plan has to work for both the company and the staff. They should be fair, transparent, and on target. 

“Some of the best programs I’ve worked with provide a percentage of the employee base salary,” says Slutsky. “As your job role, title and level of responsibility increase, so does your bonus allocation.”

Goldbeck adds a succinct summarization of an effective plan: “It has to be sophisticated enough to incentivize someone, but simple enough that it’s transparent and obvious,” he says.

Cited Sources

Personal Communication with Judy Slutsky and Henry Goldbeck.