Factors to Consider When Designing a Short-Term Incentive Plan

Attracting and retaining talent has been one of the top ongoing challenges faced by Companies today. Providing a competitive total compensation package for employees may include designing a short-term incentive plan to not only attract potential candidates, but to motivate current employees.

A short-term incentive pay plan is a formula-driven plan designed to reward the accomplishment of specific results. The focus of a short-term incentive plan is to create incentive for employees to achieve a goal in a shorter period of time, typically for one year. Rewards are tied to desired results identified at the beginning of a Company’s performance cycle. These plans can be individual, group, companywide or a combination. Incentives are forward-looking and focuses on rewarding targeted goals for an organization. These goals may be determined monthly, quarterly or annually depending on business needs.

Below is an outline of the key steps to consider for designing an incentive pay program.

• Purpose: It is critical to determine the targeted results and behaviors an organization would like to achieve, as well as setting the objectives and measures that will yield success. This focus needs to be communicated well to participants so that they have a good understanding of why they are trying to achieve the goals set with this plan and also what the rewards are when they are successful.
• Participation: Determining who will be participating in the plan and establishing eligibility guidelines would be the next step. Understanding your current population and where a short-term incentive plan would be beneficial as well as whether an organization would like the incentive plan provided at an individual, group, companywide or a combination level.
• Metrics: Selecting which metrics are meaningful and measurable will lead to a successful incentive plan. Examples of companywide measures include Annual Sales, Revenue Growth, Net Income or Earnings per Share. Understanding how these measures work will be key to the success of the program. Not only is it important to have metrics in place, it is also critical to be able to administer them in a timely and efficient manner, depending on how each plan performs.
• Structure: Once measures are determined, an incentive structure is implemented. First goals need to be established which outlines the objectives that employees are trying to accomplish. Then the criteria for awards need to be set. What is the minimum threshold of the award and what is the maximum limit. Will there be a cap or will the structure be uncapped so that potential revenue is not limited? The structure is then governed by parameters that outline when performance is measured and paid out, as well as any exceptions that may be integrated into the structure. Note that your structure needs to be as flexible as your business and should tie into the Sales cycle. This ensures that you have most of the key data needed to be input to determine incentive payout awards.
• Implementation: Rolling out a short-term incentive plan must be accompanied with a plan to educate all Managers and Staff. Without education on the plans created, we would not be delivering the highest quality work promised to our clients. When creating an implementation plan, assigning a Project Manager role to help facilitate differing opinions is helpful. The Project Manager will also ensure the project is progressing in a timely manner.
• Administration: There are many areas when it comes to administration. At MCM, ensuring governance of set policies and procedures, monitoring plan progress and processing payouts in a timely manner are critical to the short-term incentive plan administration process.
• Evaluation: It is also important to assess whether the short-term incentive plan is achieving targeted goals. Conducting a plan evaluation process will ensure that plan targets are being met by participants and the goals set forth by the organization’s leaders are being achieved.

Successful incentive plans must tie to business strategies. When rolling out a new short-term incentive plan, providing continuous communication to plan participants is critical. Plan participants must understand how the plan works and how it ties to the organization’s overall strategy. They must also understand their individual or team goals as well as their metrics.

Designing incentive plans takes collaboration and teamwork from Leaders as well as Line Managers. Finding the right combination of base pay and incentive pay for employees can drive quality-drive, bottom-line results for an organization. Incentive plans must be tailored to fit each operation and can vary depending on team member and leadership skills, as well as the operation’s location.

Tiffany Cardwell is a Principal Consultant on MCM’s HR Advisory Services team. Her expertise lies in over twenty years of experience in domestic and international human resources. She has expertise in acquisitions, change management, engagement, leadership coaching and development, performance management, compensation and total rewards, talent acquisition and workforce planning.

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