Employee compensation is a topic that HR leaders come back to year after year since it heavily impacts team member engagement, satisfaction, and retention. In particular, incentive compensation plans require careful consideration and strategic planning.
Considering everything from the current economic climate, to what competing organizations are doing, to what type of incentive plan will best motivate employees, it’s a lot of information to take in. But don’t worry! In this guide, we’ll discuss the ins and outs of incentive plans and answer your most pressing questions. We’ll cover:
- Frequently Asked Questions about Incentive Plans
- Types of Employee Incentive Plans
- How to Create an Incentive Compensation Plan
- 7 Examples of Incentive Programs to Include in Your Plan
- Best Practices for Successful Incentive Planning
Let’s get started so you can take your employee compensation strategy to the next level with an expertly created incentive plan.
Frequently Asked Questions about Incentive Plans
Let’s start by answering questions you may have about creating incentive plans for your organization.
What is an incentive compensation plan?
Incentive plans, also called incentive compensation plans, are a type of employee compensation structure that uses certain rewards to motivate team members to work harder and achieve specific goals.
When using this type of structure, long-term incentives for team members fit alongside employee pay, benefits, and perks to make up a holistic compensation package:
These incentives go beyond the paycheck and benefits that all employees should receive for the hours they work. Oftentimes, incentive plans use a mix of monetary and non-monetary rewards like sports tickets, gift cards, or vacation days.
How do employee incentive plans work?
Business and organization leaders often use incentive plans as a way to bolster revenue and keep employees motivated. The aim is to strategically leverage team-based or individual incentives to drive specific outcomes and align employee actions with your organization’s goals.
For an employee incentive plan to work successfully, it’s crucial for your team members to be on board and excited to work hard for the incentives you offer. Make sure that everyone’s on the same page regarding organizational objectives so they understand how to earn your incentives and why they’re working towards those goals.
What are the benefits of incentive plans?
When designed and implemented strategically, incentive compensation plans come with many benefits for both employers and employees. Typically, these benefits include:
- 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 in the long run.
- Increased progress toward organizational goals. An incentive compensation plan can not only keep your employees on track but also better align your overall organizational progress with specific strategic goals.
- Fun rewards for meeting certain targets. Who wouldn’t love getting an extra PTO day or a GrubHub gift card for accomplishing a value-added task?
- Healthy sense of competition and teamwork among employees. By nature, incentive compensation plans will motivate employees to work harder on their individual tasks. But they also can inspire employees to work together, especially if your goals involve multiple roles collaborating.
- More employee investment in the organization’s 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 ultimately depend on the type of plan you implement and how much it resonates with employees. Usually, incentive plans are flexible and can be adapted to fit your unique organizational structure and team member preferences.
What are common incentives for employees?
Incentive plans can include any number of monetary and non-monetary incentives as long as they interest your employees. Typically, these incentives may take the form of:
- Project or performance-based bonuses
- Employee gifts like gift cards, experience packages, or branded merchandise
- Additional PTO
- Professional development opportunities
- Public recognition
- Tuition reimbursement
We’ll dive deeper into a few of the most common individual incentives later in this guide. For now, let’s cover the main types of incentive compensation plans so you can choose which type fits your organization best.
Types of Employee 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, and organizations may thrive on one form of incentive over another depending on the mix of industry and position types. The main differences can be broken down like this:
Individual employee incentive plans are compensation programs that focus on targets and rewards for just one team member.
By publicly recognizing individuals and highlighting how they achieved a goal, these incentive plans motivate top performers to keep up the good work while inspiring other team members to become stronger contributors.
However, the downside is that individual incentives can create an overly competitive environment. Workers may be pushed to cross boundaries and make questionable decisions to reach goals.
Team-Based (Group) Incentive Plans
Team-based or group incentive plans reward groups of employees based on group or organizational performance.
These incentive plans promote positive peer pressure since employees are often motivated by the fear of letting down their team members. Plus, each team member can bring their own unique skills and experience to balance their team and motivate everyone to do their best in their assigned roles.
In a best-case scenario, team-based incentives empower employees to work harmoniously. In the worst-case scenario, however, the exact opposite could happen. Possible infighting with unmotivated or defiant employees can result in a hostile work environment, while low-performing employees may 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. They often include team-based plans with outcomes requiring collective efforts, then distribute awards based on individual performance in contributing to that collective effort.
Since other employees can gain recognition for their efforts for the whole collective, hybrid incentive plans lower the chances of an overly competitive environment developing. Careful monitoring and transparent reporting also can ease possible negative competition.
How to Create an Incentive Compensation Plan
Now that you know the benefits and disadvantages of different types of incentive plans, it’s time to put them into action!
To create an employee incentive plan, start by evaluating your existing compensation structure and setting a few goals for your incentive programs. For example, do you want to increase sales by motivating individual members of the sales team? Or do you aim to boost employee satisfaction and retention by fostering a more positive, rewarding work culture?
Next, outline the types of incentives you’ll include in your plan, guidelines for how the incentive program will work, and methods for tracking your team’s progress. Make sure to include the following elements:
- Monetary incentives such as performance bonuses, merit-based pay raises, and tuition reimbursement programs
- Non-monetary incentives like employee gifts, staff outings, or skill development opportunities
- Eligible employees for specific incentives, such as guidelines that state only members of the sales team are eligible for quarterly sales-based bonuses
- Performance indicators you’ll use to measure both employees’ performance and your incentive plan’s success
- Progress reports and reporting procedures for individual and team-based incentives
- Room for adjustments so you can adapt your plans if achieving the goals turns out to be unfeasible or unrealistic due to external forces
Incentive compensation plans come with a lot of moving parts and considerations, so consider working with a compensation consultant who can help you evaluate your strategies and formulate the best plans.
7 Examples of Incentive Programs to Include in Your Plan
When choosing the individual incentives to include in your new employee incentive plan, consider the following common options:
In addition to the annual bonuses you usually distribute, you might include rewards-based incentives like:
- Spot bonuses: Small cash bonuses you give from time to time for specific occasions when employees go above and beyond
- Performance-based bonuses: Annual or quarterly bonuses that are solely determined by employee performance
- Referral bonuses: Bonuses you give to individuals when they refer a new team member to your organization
2. Employee recognition
Recognizing employees both publicly and privately for their achievements can be a powerful motivator to work harder. Consider creating a recognition incentive program where a select number of employees receive public shout-outs at team-wide meetings, on your organization’s social media accounts, or via other avenues on a regular basis.
3. Employee gifts
Small gifts work especially well as individual incentives for team-based goals. For example, you might select different prizes individuals can win for their contributions toward an organization-wide quarterly project. Top performers can receive gift cards, branded merchandise, or even experiences like a spa day or ziplining outing.
4. Extra vacation days
Additional PTO is a highly desired incentive for many employees. In fact, studies show that paid time off is the second most valued benefit among US employees after health insurance. To give your employees an easy morale boost, offer one or more additional vacation days for top performers.
5. Stock options
Some companies provide employees with the option to buy shares of the business’s stock at a set price as an incentive. This option can motivate employees long-term since they’ll have a new stake in the company’s success, promoting increased loyalty and employee retention.
6. Tuition reimbursement
Provide tuition assistance for employees who want to broaden their skills by taking classes or earning a new degree. As the price of higher education in the US continues to increase, this is a highly enticing incentive for many Americans.
7. Professional development opportunities
Show employees that you want to reward them for their hard work and invest in their professional growth by providing development opportunities. These could include free certification classes, training programs, or stipends for employees to choose development opportunities outside of work.
Best Practices For Successful Incentive Planning
No matter what types of incentives you include in your incentive compensation plan, following a few essential tips can keep your processes organized and set you on the path to success. As you implement your new incentive plan, follow these best practices:
- Invest in technology to track and facilitate your incentive programs. Choosing performance management software with metrics capabilities and effective reporting features is key for keeping your team members informed and motivated.
- Track key performance indicators (KPIs) continuously. 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. Having reports for both individual and group progress 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 your incentive plans to unforeseen circumstances. If the changing economy or other factors affect how you can compensate team members, there’s nothing wrong with tweaking your existing incentive plan to better reflect a new budget.
- Communicate with employees and management about program progress. If you see that your incentive plan is driving monumental value, communicate this with your team! On the other hand, if the plan fails to drive the intended results, 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 toward 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 employee incentive plans, organizations need to strike the right balance. Your incentives 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.
For more information on incentive planning and creating compensation plans that motivate your team, check out the following resources:
- Employee Compensation: Full Guide & 6 Strategy-Refining Tips. Go beyond incentives and learn more about creating the best compensation packages for your employees, including how to determine salaries and benefits for different roles.
- Compensation Consulting: A Full Guide & 16 Top Firms. Want an expert opinion on your incentive compensation plans? Check out our list of the top consulting firms that can help you refine your strategy.
- Employee Recruitment and Retention: 10 Winning Strategies. Engaging and retaining employees takes more than the right incentives. After creating your incentive plan, try these additional strategies for keeping your team members satisfied.