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Factors to consider when designing short-term incentive plans

Attracting and retaining talent is a major challenge facing today’s companies. Short-term incentive plans may provide the competitive total compensation package you need to not only attract new candidates, but motivate the employees you already have.

A short-term incentive pay plan is a formula-driven blueprint designed to reward the accomplishment of specific results. The focus of a short-term incentive plan is to create incentives that motivate employees to achieve a specific goal in a short period of time, typically one year. Rewards are tied to desired results identified at the beginning of a company’s performance cycle. These plans can be individual, group, companywide or a combination. Incentives are forward-looking, and focus on rewarding targeted goals for an organization. These goals may be determined monthly, quarterly or annually depending on business needs.

These are the key steps you should consider as you design your own plan:

Purpose. It is critical to determine the targeted results and behaviors an organization would like to achieve, as well as setting the objectives and measures that will yield success. This focus needs to be communicated fully to participants so that they have a good understanding of why they are trying to achieve these particular goals and how they will be rewarded if successful.

Participation. Determining who will be participating in the plan and establishing eligibility guidelines is the next step. You need to understand your current company population and where and how a short-term incentive plan would be most beneficial.

Metrics. Selecting which metrics are meaningful and measurable will lead to a successful incentive plan, whether this is annual sales, revenue growth, net income or earnings per share, to name only a few examples. Not only is it important to have metrics in place, it is also critical to administer and communicate them in a timely and efficient manner.

Structure. Once measures are determined, an incentive structure is implemented. First goals need to be established which outlines the objectives that employees are trying to accomplish. Then the criteria for awards need to be set. What is the minimum threshold of the award and what is the maximum limit? Will there be a cap or will the structure be uncapped so that potential revenue is not limited? The structure is then governed by parameters that outline when performance is measured and paid out, as well as any exceptions that may be integrated into the structure. Note that your structure needs to be as flexible as your business and should tie into the sales cycle. This ensures that you have most of the key data needed to be input to determine incentive payout awards.

Implementation. Rolling out a short-term incentive plan must be communicated to all staff to whom it applies.  Assigning a project manager to help facilitate the process can be helpful.

Administration. It is critical that the plan’s administrators ensure governance of set policies and procedures, monitor plan progress and process payouts in a timely manner.

Evaluation. Conducting a plan evaluation will ensure that plan targets are being met by participants and the goals set forth by the organization’s leaders are being achieved. It can also help you decide if the ROI on the plan is worth continuing it into the future.

Designing incentive plans takes collaboration and teamwork to ensure it is the right fit for your company. Finding the best combination of base pay and incentive pay for employees can directly benefit the bottom line of your organization.

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