Top 10 Considerations for Creating or Modifying an Incentive Plan

Whether you have a current incentive plan or are in the process of creating a new one, there are many things to consider to ensure the plan promotes intended behaviors and drives business success.

As a starting point for the incentive plan design (or redesign) process, here are my top 10 questions to ask when you’re developing broad-based and/or sales incentive plans:

1) Is there an articulated corporate strategy?
If the corporate strategy is communicated company-wide or at least to your incentive eligible participants, you should do a “pulse check” to make sure it’s understood. Create and execute a communications plan that reinforces your corporate strategy regularly throughout the year.

2) Do the selected metrics support your corporate strategy?
Review the metrics to confirm that they support the corporate strategy. Even if the corporate strategy is clear and understood, if your incentive plan metrics (whether quantitative or qualitative) are not directly or indirectly related to the corporate strategy, you may not be getting the desired outcomes or behaviors from your incentive-eligible employees.

3) Are the metrics understood?
Incentive plan metrics should be clearly defined so the participants know exactly what needs to be achieved. If the metrics are complex, participants should be educated so they fully understand the metrics and the other factors that influence them.

4) Can the incentive eligible participants directly or indirectly influence the selected metrics?
The level of influence can help determine the weighting. The more influence a person has over the selected metrics, then the more weight those metrics should carry in the incentive plan. There will be cases where a certain metric or metrics fund a plan, and some participants will not have much control over those metrics — but they’re still included. Plan design should account for these funding type metrics and weight them accordingly.

5) Can the metrics impact the success of your organization?
If the metrics do not directly or indirectly impact the performance of your organization, then you may need to consider utilizing other metrics. (This applies to both quantitative and qualitative metrics.) Regardless of metric type, they should correlate to the success of the business.

6) Will the plan have a defined threshold performance, below which no incentives are paid?
At the most senior levels, it’s not uncommon to pay zero in incentives if the performance is not at an acceptable level. However, if your incentive plan includes employee groups who do not (or cannot) directly influence the performance of the selected metric, they can become disillusioned and the incentive plan may not achieve the desired results.

For example, let’s assume you have a group of engineers working on developing the next new product that will drive revenue in future years — but the current year performance is such that threshold performance was not met, and no incentives are paid. This group of engineers may start to look for “greener pastures” before completing the critical work on the new product.

Be mindful with regard to who is eligible to participate in the incentive plan, especially when incentives for any given year can be zero. You may consider setting up separate and distinct incentive plans for different employee groups, or have some amount of discretionary funding to handle situations like this.

7) What is the overall weighting in the plan of quantitative vs. qualitative goals?
Review the incentive plan on a macro level and estimate the % of the total incentive pool that’s paid out based on qualitative versus quantitative goals. This is important — especially if there isn’t a defined threshold in the incentive plan. It’s good practice to understand what level of incentives can or will be paid, even if the performance of certain financial metrics is not ideal in any given year.

8) Can the selected metrics be reported accurately and on a timely basis?
This is a practical, yet important consideration for any incentive plan. Timeliness is especially important when providing regular updates (i.e. monthly or quarterly) to participants. Review the systems being used to report financial metrics and the communication strategies that you use to update participants on their progress towards goals.

Also, check to see if metrics will need to be tied back to individual employee performance (i.e. sales employees). Most financial systems can easily report metrics at the organization, unit or division levels, but once metrics need to be translated down to an individual, there’s room for uncertainty or error. Before finalizing metrics such as these, understand the reporting challenges and build a process for handling calculation conflicts.

9) Does target performance of the quantitative financial goals yield a profit?
In the end, you need to make money in order to pay for the incentives. If modeling of the selected metrics at target levels does not yield desired profits, then consider adjusting the performance targets for these metrics accordingly.  When modeling the financial results, run multiple scenarios to understand the impact at different levels of performance — poor, good, excellent, etc.

10) Does the modeling only focus on the financial impact of the incentive plans?
Modeling is a good practice to understand the financial impact of incentive plans, but it can also provide you with an opportunity to review the operational and human impacts of these programs as well.

Take a holistic view of all the things that will be impacted by implementing the incentive plan. Reviewing the resources, processes, policies and/or systems needed to communicate and manage programs effectively — before programs are implemented — will help avoid unwanted surprises.

While there are certainly other considerations and unique situations that weren’t addressed here, reviewing these questions will help you balance the needs of all stakeholders when designing or modifying an incentive plan.

What does your organization consider when designing or modifying an incentive plan?  Please share any comments on LinkedIn at https://lnkd.in/d2zenEh.