Incentive compensation tips and pitfalls shared

Orlando, Fla. -- Incentive compensation should directly communicate an organization's objectives to employees, so why do so many plans fall short of success? In presentations at the 2012 WorldatWork Total Rewards Conference here May 21 to 23, 21012, compensation specialists shared lessons on the effective use of incentive pay programs and warned of errors to avoid.

“First, determine the business strategy and objectives that incentives are intended to drive,” advised Jason Adwin, senior consultant at Sibson Consulting. “The role of incentives is to motivate and engage employees in order to drive intended business results, and reward and differentiate employees fairly for the value they create,” he noted. “Some employees are going to give above and beyond, with or without incentives. But the program, by sharing their success stories and modeling their behavior, motivates the others.”

“Know what you provide vs. the market and use it to your advantage” for recruiting talent and ensuring engagement among employees, recommended Elyse Lyons, senior consultant at Sibson Consulting, who co-presented with Adwin.

Confusing metrics

According to Lyons, incentives don’t work when they become an entitlement, leaving employees disappointed if incentive levels decreases from one year to the next.

Another pitfall: confusing metrics with no clear line of sight, requiring multiple Excel spreadsheets to explain and track. “Employees should be able to figure out the incentive plan on a paper napkin,” Lyons argued.

Also beware of plans that demotivate high performers through insufficient differentiation, and misaligned efforts that result when teams have conflicting incentives. “One sign of misalignment is when c-suite executives earn incentives and middle management doesn’t,” Adwin noted, adding, “When individual, department and organizational incentives align, employees can see how their actions help the organization to succeed.”

Everyday excellence

Another common mistake, Adwin pointed out, is requiring effort beyond everyday job responsibilities to earn incentive pay. Instead, incentives should reward excellent performance within an employee’s normal job duties if that performance is an outsized contribution to the organization’s success.

Bonus amounts that don’t seem large can change behavior for the better, Lyons noted. She related how when the former Continental Airlines wanted to improve its poor on-time departure record, the airline began offering a flat bonus of $65 a month to members of crews with the best on-time departures. As a result, pilots started helping flight attendants clean up plane cabins to ensure timely departures.

“Train your managers to explain that, when incentives are not earned, ‘the performance of our business would not allow us to give the incentive you wanted,’ ” said Adwin.

During another session, Carrie Ward, director of consulting services at SalesGlobe, suggested informing employees’ spouses about incentive pay programs so they can encourage their spouses to strive for those higher rewards. “Send incentive program information to home addresses,” she recommended.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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