Designing an incentive compensation plan

Incentive compensation plan

Question: What are the key issues a company would need to consider when designing an incentive compensation plan?

Incentive compensation plan

Incentive compensation plan is a plan which is designed to pay extra money to those workers who had great performance and achieve goals. This compensation plan can be profit sharing, bonuses, commission or corporate stock ownership. It depends on type of incentive compensation; the incentives may give to work groups, individual employees, the organization or the combination of all above.

There are two types of incentives (Jeffrey, S., & Shaffer, 2007)

Casual incentives

In casual incentives, employees never know when a reward will be given to them. Employee doesn't have any idea about the incentives plan of the company. It would be surprising for employee when he/she would be getting reward and incentives. (Hansen, F. (2007)

Structural incentives

In structural incentives, an employee knows the relationship between reward and performance. Employee must have an idea about his/her performance and the reward or incentive he is going to have in the future.



Key issues for designing incentive compensation plan

There are many key issues when a company is designing incentive compensation plan, these are discussed in the following

Lack of line management skills

Lack of line management skills is the most important issue when a company is designing the incentive compensation plan or reward strategy. Front line managers (FLMs) are not sufficiently trained and capable in reward management. Managers are not completely trained and capable to manage in an effective manner. (Hansen, F. (2007)

Effectively communicate to the employees

The most important step is creating an effective incentive compensation plan is to effectively communicate to the employees. Company must have information about their employees that how much bonus is required for individual performance and how much company is achieving its goals and strategies. It ...