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Building a Better Incentive Plan

Blending the World at Work and Brad Hams Approaches

By Mykkah Herner, PayScale.com

Last month, I read and reviewed Brad Hams’ Ownership Thinking, and promised to write more on his sense of having the right incentives. While I thought he has some useful suggestions, I found his incentive plan to be both too prescriptive and too detailed.

Ultimately, I find that World at Work, the experts in the compensation field, explain incentives best. So, rather than spend a lot of time on a plan that can use a little more cohesion and a little more variability, I’ll focus on World at Work’s explanation of incentive plans, and weave in some gems from Hams. World at Work focuses on three stages: pre-design, design, and implementation.

Three Stages to Incentive Plan Development

1. Pre-Design

World at Work suggests that the first steps to developing an incentive plan are in the pre-design phase, where you consider internal and external factors, garner management support, and identify your design team. The idea is that you can’t just jump into designing without making sure you have the right people at the table, at least some management buy-in, and know the context in which you’ll be designing your plan. Is your organization ready for an incentive plan? What’s going on in the market? Do you have the budget to fund an incentive plan? Hams’ would add, and I fundamentally agree, that an incentive plan program must-be self-funding.

2. Design

The design phase, according to World at Work, includes designing the plan objectives, determining eligibility, and setting the performance measures.

  •  Are Plan Objectives or Goals Easy to Explain and Understand? What are you trying to accomplish? If it fits your organizational culture, consider involving employees in developing the plan goals. Hams would say that the more you include staff, the more they will feel ownership over the plan, and the more they will deliver.
  • Who Will be Eligible for the Incentive Plan? Whose performance affects the bottom line? What is your organizational culture? Can you create a clear line of sight between performance of the individual and organizational performance? If not, an incentive plan may not be the way to go for their position.
  • How Will You Measure Performance? Hams suggest that one to two key indicators are enough. What is the most important thing you want to improve or focus on this year? How can you measure it? This is another great place to include staff, especially front-line managers.

3. Implementation

The final stage in developing your incentive plan, according to World at Work, includes developing your targets and payouts, funding the plan, and distributing plan earnings. It’s in this stage that the rubber really hits the road.

  • Targets and Payouts: Consider setting tiers for your incentive payout so that you can create stretch goals with a larger return for better performance.
  • Funding the Plan: Set an organizational performance threshold below which no incentive payment is made.  The threshold Hams talks about includes the budget for the incentive plan program, not just breaking even.
  • Distributing Plan Earnings: Someone will need to determine whether the goal has been met. Usually the manager will deliver this information to the accounting folks. However you design it, you want the administration of your incentive plan to be simple and clear-cut.

4. Evaluation

Yes, I promised three stages, but consider this your (discretionary) bonus. No plan would be complete without stopping to evaluate the plan. Are the right behaviors being achieved/rewarded? Have you achieved the goals outlined by the plan? Incentive plans should be evaluated after the cycle is complete, and annually thereafter. Are your metrics still holding up? What do you want to prioritize in the coming year? By being strategic with your funds, you’ll definitely find that you get much more bang for your buck.

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