Incentive Pay


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Incentive Pay

  1. 1. Variable Pay Plans Presented by Ted Turnasella Comp-unications
  2. 2. Variable Pay Plans THE MOTIVATIONAL MODEL Something to keep in mind... EMPLOYEE’S EFFORT EXPECTED RESULTS MEANINGFUL REWARD Skills, Tools, Information, Autonomy, Fairness of Goal Trust, Timing, Performance Review, Interpersonal Conflict
  3. 3. The Objectives <ul><li>To focus employee energy on the things that matter to the company </li></ul><ul><li>To ensure a fair exchange of value between the company and the employee for achieving measurable results, effective behaviors, or desired outcomes </li></ul><ul><li>To provide flexibility in the compensation offered to employees as a cost management strategy and a reward strategy </li></ul><ul><li>To compete for and retain talent </li></ul>Variable Pay Plans
  4. 4. Variable Pay Plans Define Mission: What will be accomplished by the individual or unit? Define Role: What will the individual or team be required to do? Identify Areas of Discretion: Where does the individual affect the outcome? Line of sight. Select Performance Criteria : What outcomes or behaviors will determine success? Objective or Evaluative. Feasibility review. Look for the offset. Establish Goals : Is there an expectation of certain results? Define minimum acceptable and exceptional performance. Determine Frequency of Payout: How often will the incentive be paid? Implement: What will be the cost? How will we communicate? Process Steps Determine Targeted Earnings: How much incentive will the successful employee be paid?
  5. 5. Definitions <ul><li>CRITERION </li></ul><ul><li>A basis for comparison. What you intend to look at to measure performance. </li></ul><ul><li>Good criteria are… </li></ul><ul><ul><li>Valid: Does the criterion actually measure what it is intended to measure? </li></ul></ul><ul><ul><li>Reliable: Will the criterion deliver consistent, actionable results? </li></ul></ul><ul><ul><li>Measurable: Can the criterion be measured? </li></ul></ul><ul><ul><li>Understandable: Can the criterion be communicated and understood by plan participants? </li></ul></ul>Variable Pay Plans
  6. 6. <ul><li>GOAL </li></ul><ul><li>A predetermined level of performance embedded within a criterion. </li></ul><ul><li>Good goals are… </li></ul><ul><ul><li>Business-based: Will reaching the goal generate an economic or strategic gain for the company? </li></ul></ul><ul><ul><li>Specific: Is the goal expressed in specific terms? </li></ul></ul><ul><ul><li>Realistic: Given the variables in play, can the goal be reached? </li></ul></ul>Definitions Variable Pay Plans
  7. 7. Criteria Characteristics <ul><li>There are two basic kinds of criteria </li></ul><ul><ul><li>Quantitative </li></ul></ul><ul><ul><li>Evaluative </li></ul></ul><ul><li>Consider the Olympic Games… </li></ul><ul><ul><li>Some events can be measured quantitatively… foot races, high jump, weight lifting </li></ul></ul><ul><ul><li>In other events, performance can only be evaluated… gymnastics or diving </li></ul></ul>Variable Pay Plans
  8. 8. Criteria Characteristics <ul><li>Quantitative criteria … </li></ul><ul><ul><li>Allow targeted and actual results to be expressed in quantitative terms </li></ul></ul><ul><ul><li>May or may not contain pre-defined performance goals or targets </li></ul></ul><ul><li>Evaluative (not discretionary) criteria … </li></ul><ul><ul><li>Can be improved through the use of pre-defined evaluation factors and scales </li></ul></ul><ul><ul><li>Outcomes may be expressed in quantitative terms based on the evaluations made </li></ul></ul><ul><ul><li>May or may not contain pre-defined performance goals or targets </li></ul></ul>Variable Pay Plans
  9. 9. <ul><li>Threshold-Based </li></ul><ul><ul><li>A stated minimum level of performance for which a partial bonus will be paid. </li></ul></ul><ul><li>Target-Based </li></ul><ul><ul><li>A set bonus amount only paid for reaching goal. </li></ul></ul><ul><li>Capped </li></ul><ul><ul><li>A limit placed on the amount of bonus paid without regard to performance. </li></ul></ul><ul><li>Uncapped </li></ul><ul><ul><li>No limit to the amount of bonus that may be paid. Bonus based on a formula </li></ul></ul>Elements of the Performance Range Variable Pay Plans
  10. 10. Components of a Bonus Plan <ul><li>Creation of the Bonus Pool </li></ul><ul><ul><li>Usually based on some financial metric at the company level </li></ul></ul><ul><ul><li>May be formula-based </li></ul></ul><ul><ul><li>Size of pool may vary based on performance against a financial metric </li></ul></ul><ul><li>Distribution of the Bonus Pool </li></ul><ul><ul><li>Performance metrics may be measured at the department, team, or individual level </li></ul></ul><ul><ul><li>Bonuses may be awarded equally by percent of base or by dollar amount or differentiated by individual contribution </li></ul></ul>Variable Pay Plans
  11. 11. Components of a Commission Plan <ul><li>Defining the Commission Formula </li></ul><ul><ul><li>Usually based on some financial metric at the individual level </li></ul></ul><ul><ul><li>Formula-based </li></ul></ul><ul><ul><li>Single or multiple commission rates </li></ul></ul><ul><ul><li>Often, but not always, used in combination with base salary </li></ul></ul><ul><ul><li>Usually paid out more often than bonuses </li></ul></ul>Variable Pay Plans
  12. 12. <ul><li>Use of quantitative criteria whenever possible </li></ul><ul><li>Collaborative goal-setting process </li></ul><ul><li>Timely, accurate feedback </li></ul><ul><li>Review of supporting feedback systems and job resources </li></ul><ul><li>Analysis of the internal or external business environment </li></ul><ul><li>Informed, consistent management discretion </li></ul>Effective use of goals in incentive plans Variable Pay Plans
  13. 13. Issues to Resolve <ul><li>Statement of incentive plan objectives and underlying compensation philosophy </li></ul><ul><ul><li>Why do we have an incentive plan? </li></ul></ul><ul><ul><li>Should only exceptional performers get incentives? </li></ul></ul><ul><ul><li>Are the performance factors underlying an incentive payment different from those used for merit increases? </li></ul></ul><ul><ul><li>Are the right people eligible for an incentive? </li></ul></ul>Variable Pay Plans
  14. 14. <ul><li>Critical review of existing performance criteria and goals </li></ul><ul><ul><li>Do current performance criteria really indicate performance that matters? </li></ul></ul><ul><ul><li>Do the criteria and goals work to create value for the company and the employee? </li></ul></ul><ul><ul><li>Are the goals for this incentive period realistic and attainable? </li></ul></ul><ul><ul><li>Are the performance criteria and goals known and understood by plan participants? </li></ul></ul>Issues to Resolve Variable Pay Plans
  15. 15. <ul><li>Explore areas for cross-functional performance criteria and goals </li></ul><ul><ul><li>Are their performance criteria and goals that depend on cross-functional efforts in order to be reached? </li></ul></ul><ul><ul><li>Are their effective work coordination processes in place to support joint efforts? </li></ul></ul><ul><ul><li>Is there any conflict embedded in the respective roles of cross functional departments? </li></ul></ul>Issues to Resolve Variable Pay Plans
  16. 16. <ul><li>Evaluation of the feedback systems and resources which support the incentive plan </li></ul><ul><ul><li>Are there feedback systems in place to inform plan participants of their current performance levels? </li></ul></ul><ul><ul><li>Do plan participants have the training, tools, and information they need to reach their performance goals? </li></ul></ul><ul><ul><li>Is there anything in the internal or external environment that will enable or disable a participant’s ability to reach their goals. </li></ul></ul>Issues to Resolve Variable Pay Plans