Incentive Plan Design Is Tough to Get Right
What happens is that a lot of people know that they need to have a pay for performance plan but they lack the expertise to design a plan that makes sense. I’ll admit that, even when I was doing compensation work, I lacked expertise until I started doing compensation full time. It isn’t easy to design incentive plans.
Even for someone who is very skilled at the basics of compensation planning, incentive design is hard. There are two kinds of compensation people in this world who make top dollars: people who do executive compensation and people who do incentive design. This is because they are really hard to get right.
The Missing Piece
Incentive plan design needs to go back further than general compensation planning and align very closely with business needs and necessities. One of the most important things, and where people fall short, is the “line of sight.” Line of sight is the concept that employees actually have to feel like they affect the results of an action in order to feel motivated. If they don’t feel like they have control, they’ll disengage.
I was working with an organization recently that had a very generous profit-sharing plan and the concept was that if the company was profitable it was because of the contributions of all level of employees. I love that in theory. It was structure in a tiered way, where the rewards were based upon a percentage and according to performance. Lower-level employee with low performance would get less than a higher-level employee with high performance.
But, in terms of driving performance, that was not what this program was achieving. Many of the employees felt disconnected from actually having an effect on the profitability of the organization.
We all know that everyone contributes but very few actually have the opportunity to make a company profitable or not. Therefore, in terms of an incentive design, that was not a good incentive but, rather, a great plan to show another value that the company has: honoring all members' contributions.
When it comes to incentive design, we want goals that line up with what people feel like they can control.
For example, I was talking to a friend who works for a very large healthcare organization. They were in goal planning time and were working on cascading goals. Cascading goals are when a company has a mission, that leads to strategic goals for each division, then those lead to goals by department and so on.
She was meeting with this large executive team to name these goals. They were making great progress at the beginning at making strategic goals for the company, but when it came to the cascading goals, they were still making them way too high level. One of her points was, “If we are going to incent on these goals and we’re going to track people’s performance and rate them on these measures, they have to be something that the employee feels that they can control.”
Like many healthcare organizations, this company is implementing a whole new electronic records management system. And, when they came to the front line employee, their RNs and LPNs, they were making big goals about the success of the program and my friend reminded them that these people were not going to have, likely, control over the success of the entire program. What they would have control over is making sure that they were trained on how to use these new systems.
Armed with that perspective, the executive team created goals for these RNs and LPNs that these employees would participate in at least three trainings in that year. They were already incenting the training people to make the training really meaningful and really good, in terms of helping people work this new system into their daily process. So, they needed to reward the front line people in making sure they attended to those trainings.
Once they made this decision about incentive attendance at training, the leadership team worried that it was too simple. But, my friend fought hard and made a really important point about line of sight. Incentives don’t need to be complicated. They need to be meaningful and connect directly with the outcome you want.
Stacey Carroll, CCP, SPHR
Director of Professional Services and Education
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