Employee compensation is a topic that HR leaders come back to year after year. It touches many points of employee management, impacting team member engagement and their satisfaction with roles and job expectations.
In particular, incentive compensation plans require careful consideration and strategic planning. This is because this type of compensation relies very directly on your team members’ hard work.
When creating an incentive compensation plan, an organization needs to consider many factors. From the current economic climate, to what competing businesses are doing, to what type of incentive plan will best motivate employees and drive value, it’s a lot of information to take in.
Don’t worry! In this issue of Astronology®, we’ll discuss the ins and outs of incentive plans and answer your most pressing questions:
- Frequently Asked Questions about Incentive Plans
- The Difference Between Individual vs Team-Based Incentive Plans
- Best Practices For Managing Employee Incentive Plans
Ready to take your employee compensation strategy to the next level with an expertly created incentive plan? Let’s begin.
Frequently Asked Questions about Incentive Plans
What is an incentive plan?
Incentive plans are a type of employee compensation structure that uses certain rewards to motivate team members to work harder and achieve specific goals.
This type of compensation goes beyond the paycheck and benefits that all employees should receive for the hours they work. Oftentimes, incentive plans use non-monetary rewards like sports tickets, gift cards, or vacation days.
How do employee incentive plans work?
Business and organization leaders often will use incentive plans as a way to bolster sales and keep employees motivated. The aim is to strategically leverage incentives to drive specific outcomes and align employee actions with your organization’s goals.
To instill an employee incentive plan, you’re going to need your team members on board, pick incentives they’ll actually work hard for, and make sure that everyone’s on the same page regarding organizational objectives.
What are the benefits of employee incentive plans?
Here are how incentive plans benefit your company:
- Increased employee motivation and productivity. With concrete targets, employees can better focus on the tasks that support these efforts. And, with incentives and prizes to motivate them, employees will work even harder to achieve those goals.
- Increased employee retention rates. Fun prizes and rewards can create a more engaging atmosphere for employees, motivating them to continue adding value to your organization for the long run.
- Set goals to guide overall progress. An incentive compensation plan can not only keep your employees on track but also better align your overall organizational progress with your specific strategic goals.
Here are how incentive plans benefit employees:
- Fun rewards for meeting certain targets. Who wouldn’t love getting an extra PTO day or a GrubHub gift card for accomplishing a task?
- Healthy sense of competition and teamwork. By nature, incentive compensation plans will motivate employees to work harder on their individual tasks. But it can also inspire them to work together, especially if your goals involve multiple roles collaborating.
- Bigger investment in organization success. Because employees are working towards specific goals and are being rewarded for them, they have a bigger stake in your organization’s long-term success.
The benefits that you reap will likely depend on the type of plan you implement and how successful it is. Usually, incentive plans are pretty flexible and can be adapted to your unique organizational structure. However, they’ll likely fall into two categories: Individual and Team-based incentive plans.
The Difference Between Individual vs Team-Based Incentive Plans
When creating an incentive compensation plan, organization leaders need to first consider if their work environment better supports an individual or team-based program. There are advantages and disadvantages to both.
Depending on the mix of industry and position types, certain organizations thrive on one form of incentive over another. Let’s discuss the advantages and disadvantages of both individual and team-based incentives.
Individual Employee Incentive Plans
Individual employee incentive plans are compensation programs that focus on targets and rewards for just one team member.
An advantage of an individual incentive program is the recognition it gives individuals for their efforts. This type of recognition not only motivates the top performer to keep up the good work up but also can motivate others.
By storytelling how top performers achieve their goals, other team members have inspiration as to how they too can become stronger contributors.
However, individual incentives also have their fair share of problems. For starters, an overly competitive environment can be created. Workers may even be pushed to cross boundaries and make questionable ethical decisions to reach goals, which definitely should not be encouraged by your compensation strategy.
Team-Based (Group) Incentive Plans
Team-based or group incentive plans are similar to individual ones except the rewards are for groups of employees and are based on group or organizational performance.
An advantage to group incentives is positive peer pressure. One article mentions that employees are often motivated by the fear of letting down their team members. While each team member brings their own unique skillset and experience, these differences also can balance a team and motivate everyone to do their best in their assigned roles.
In a best-case scenario, group incentives can empower employees to work harmoniously. In the worst-case scenario, the exact opposite could happen.
For example, possible infighting with unmotivated or outright defiant employees can result in a hostile work environment. Low-performing employees then feel overwhelmed with pressure to perform at levels that they are not ready for.
Hybrid Incentive Plans
To curb the possible challenges from either individual or group incentive plans, some leaders lean toward a hybrid plan. This type of plan includes an overall group incentive as well as individual incentives for top performers.
This allows employees who individually go above and beyond to be rewarded while simultaneously recognizing group efforts and values.
The hybrid approach also gives other employees an opportunity to gain some recognition for their efforts for the whole collective. This lowers the chances of an overly competitive environment developing. Careful monitoring and transparent reporting also can ease possible negative competition and dishonesty in order to achieve goals.
Astronology® asked Michael Maciekowich, Astron Solutions’ National Director, for his take on the difference between the two types of plans. Mike shares with us that:
The difference between individual and team-based incentives relates to defining the outcomes and ensuring there is a clear ‘line of sight’ regarding controlling the achievement of those outcomes.
Individual incentives focus on each employee in his/her efforts to meet job-related outcomes and/or special projects. Individual incentives tend to use goals that follow the SMART acronym (Specific, Measurable, Achievable, Realistic, and Time-Bound). Success in achieving team-based goals is dependent upon accurately defining the team that will be included in the plan, such as a unit, department, or organization.
In this case, the focus is on defining outcomes that require collective efforts to achieve. Rewards are often shared equally among the team members. The most successful hybrid plans are those that are established as a team-based plan with outcomes requiring collective efforts, and with the distribution of awards based on individual performance in contributing to that collective effort.
Best Practices For Managing Employee Incentive Plans
Now that you know the benefits and disadvantages of different types of incentive plans, it’s time to put them into action! To better prepare, we’ve compiled a list of our recommended best practices.
No matter the types of incentive plan that you decide to implement, here are some essential tips that can keep your processes organized and set you on the path to success:
- Invest in key technology to track and facilitate your incentive plan program. One with metrics capabilities and effective reporting features is key. Check out our dedicated guide to performance management software for more advice.
- Keep track of key performance indicators (KPIs) and other metrics on a continuous basis. This way, you can get a sense of how your incentive plan is working in real-time. If you see that a certain task isn’t getting the engagement you’d like, you can proactively take steps to address this.
- Implement both individual and group progress reports. These reports can serve as a tool for troubleshooting, allowing time to remove potential issues before they become larger concerns. Having reports for both individual and group progress also allows you to compensate team members fairly. You can call out top performers as well as show appreciation for individuals who might not display personal progress but are adding to overall organizational goals.
- Adapt the incentive plan program to unforeseen circumstances. If something happens to affect how you can compensate team members, like a global pandemic, there’s nothing wrong with tweaking your existing incentive plan to better reflect new budgets or other impacts. And, if achieving the goals turns out to be unfeasible or unrealistic due to external forces, adapting the plan to fit new circumstances is essential.
- Communicate with employees and management concerning program progress. If you see that your incentive plan is driving monumental value, you should communicate this with your team. On the other hand, if the plan is failing to drive the expected or intended results, you should maintain transparency with this as well.
Sometimes, you need professional help to formulate the best incentive plan that meets your employees’ unique needs and drives your organization towards core goals. An HR consultant can work closely with your team to help you determine those goals and outline a detailed action plan.
When it comes to incentives, organizations need to strike the right balance. The incentive should encourage work-friendly competition and motivate the employee to do their best. Every organization is different, so it’s important to spend time auditing and observing the type of work environment your team members thrive in. Further, investing in a performance management platform can help in tracking performance metrics and tying them to incentives.
Does your organization use individual or group-based incentives? If so, do you think it helps the work environment and drives you toward your organization’s overall goals? Please share your thoughts with us and we may feature your insights in a future Astronology® issue!