Moving to Incentive Compensation
People are talking about money more than ever. From inflation to an uncertain job market, there’s a lot to make your team nervous. Incentive compensation can help lift some of the worry.
While you want to avoid getting in a battle of $1 raises to retain top talent, pay matters. It’s critical to pay people what they’re worth to your company. They give you their time and talent and need to be fairly compensated.
You want to make your workplace the place people want to be. Whether that means developing your culture, investing in your teams with training, providing solid career paths, helping your team develop personal goals, or even reworking your company’s pay structure.
What Is Incentive Compensation?
Incentive compensation is additional money paid to employees based on their performance.
The goal is to motivate employees to perform their best while helping your company achieve its targeted goals.
When done right, incentive compensation can improve morale, retention, and productivity.
Before Implementing Incentive Compensation
You already pay people to do their job. The expectation is to keep earning their paycheck, they need to do a baseline quality of work.
Now is your chance to incentivize people to excel.
If you’re going to offer incentive compensation, make sure your team has absolute control over their ability to perform. They need to know:
- What’s being measured
- How you’re keeping score
Make sure your metrics are things your team can actually control. Imagine a construction company that rolls out a bonus structure with the number one indicator being safety. The data being measured is “zero job site injuries” during the quarter. The crew in the field may be highly motivated to earn their bonus.
But what about the office staff? They have no control over injuries in the field. While this metric may be useful for the crews in the field, it doesn’t make sense for the office staff.
It’s also important to plan how you’ll keep track of performance. Imagine you want to measure the quality of service from your HVAC technicians.
Where will your metrics come from? Are you relying on customer surveys? Future service scheduled at the time of the visit? Supervisor opinion? Does your team know how you’re keeping track?
Clarity is critical when it comes to money. Take time to clearly define what’s being measured and how you’re keeping score before you roll out your new incentive compensation plan.
Rolling Out the New Program
Before you implement your new program, it’s important to sit down with each of your team members and have a clear conversation about what it looks like to outperform.
You can align their job description to show what it looks like to be successful in the role compared to what it looks like to exceed expectations and earn incentive compensation.
When employees know exactly what performance means and how it’s being measured, they’re in a better position to succeed.
Don’t Be Greedy
Once you’ve determined what’s being measured, it’s important to be consistent among your team.
Imagine your performance measurement is to land one new client per week. For your average team member, that’s a stretch. However, your rock star employee has already been landing two or more new clients every week for months.
It might be tempting to put their goal at three new clients per week to encourage them to stretch. However, punishing top talent with harder goals isn’t motivating. Your A-player needs to be compensated for their talent at the same rate as the rest of the team.
Receiving incentive compensation can help boost morale by making employees feel valued and appreciated. Keep in mind, some people on your team may prefer to be recognized in other ways – emails of appreciation, celebrating work milestones, an employee of the month award, etc.
You’ll accommodate more of your team’s internal driving forces by offering multiple pay options:
- Offer #1 – Lower Base Pay + Bonus: This works well for your highly competitive team members. In this offer, your team member receives their base pay with the opportunity to earn incentive compensation after specific metrics are met.
- Offer #2 – High Flat Rate Pay: This is great for your team members who are more internally motivated. In this offer, your team member receives a higher flat rate pay and clearly knows what it takes to excel.
Not everyone is motivated by money. According to an American Worker survey, 56% of employees polled said they prioritize job stability over salary. Offering options allows you to retain more of your employees.
“It’s time to look at your training. It’s time to look at the ways you’re developing your people, so they actually have control over being able to perform above the set standards.” – Ryan Englin
It takes time to shift your culture and for your leaders to adapt an incentive compensation plan. Determining what’s being measured and how you’ll keep track is only the first step. You also want to make sure the metrics are clearly aligned with your company’s vision for growth.
Once you establish the details, it’s time for your leadership team to get on board with implementing the plan. Be prepared for culture changes that may occur when a new program is initially introduced.
As time goes on, be diligent in reviewing and adjusting the details of your incentive compensation plan so it can be highly successful in productivity, retention, and meeting your company’s goals.