Design Philosophy and Considerations
When making an offer to a prospective hire, base salary is only the beginning of a total rewards package. Variable incentives in the form of an enticing cash bonus or robust equity package will more often than not be the deciding factor and can likely sway the decision to accept vs. reject a job offer.
Variable incentives or variable pay can be defined as any compensation opportunity where payment is not guaranteed, and the amount is determined on the basis of short- or long-term performance. In general, variable incentives can be categorized as either short-term (typically given in cash) or long-term (usually given in equity).
Employees expect it. Your competitors offer it.
Offering incentives can help you:
Done right, incentives reward employees who benefit the company, and can play a role in contributing to a success-oriented culture. But not every job requires a variable pay component, so it’s important to consider all possible benefits and trade-offs before deciding which groups to include in an incentive plan.
Negative consequences can arise as a result of incentives that are not carefully thought out. For example, a customer call center agent who’s measured by volume of calls may attempt to get people off the phone instead of spending time to solve their problems.
Country-specific company culture and social norms also play a role in determining the use of incentives, so it's important to look at each case individually to determine whether the use of incentive compensation is appropriate.
Should a company offer broad incentive eligibility with a limited number of recipients or offer limited eligibility with a high likelihood of incentive receipt?
There’s no right or wrong answer. Every company is different and will approach plan design in a way that best suits them; however, the common underlying thread needed for success is communication.
Other considerations to consider when using incentives include:
Prior to designing incentives, an organization must be set up to measure performance, have a clear purpose, understand how success is defined and communicate expectations. Those who are selected to receive incentives must be in jobs that are designed appropriately with measurable tasks, goals and objectives, as well as the means available to deliver results. Employees included in the plan must be able to easily understand the job at hand, their purpose and role in achieving it, and see a direct link between their work and the results that come from it.
When designing pay programs — salary, cash or equity incentives — it’s critical to understand a company’s market position. Some companies want to rely mostly on salary for compensation and may want to pay above market. Other companies want to rely mostly on incentives and target salaries below competitive levels, while their bonus and stock amounts may be greater than that of their competitors. Taking a step back to understand your company’s philosophy and objectives as well as defining what the competitive labor market looks like will be key.
According to the data from our Radford Trends Survey, the companies we asked all said they wanted to match the market and pay both salaries and incentives at the median. The problem with this is every company defines the market differently, with different peers, regional considerations, industries and the like. That’s why pay isn’t exactly the same for all companies because people look at different markets. Therefore, it’s really important for you to understand your pay objective and the data you use for your analysis needs to be appropriate for that task.
Learn more about how the Radford Trends Survey, now known as the Salary Increase and Turnover Study, can help your company approach compensation planning for the coming year.
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