One: Most companies today offer incentive pay to help motivate employees to work harder. This is a motivational tool used as an additional compensation awarded to employees for results, they achieved (TalentLyft, 2019). Broadly speaking, any compensation contract (explicit or implicit) that rewards employees for good performance or punishes employees for poor performance can be considered incentive pay (Brickley et al, 2016). The goal of this type of pay is to motivate the employees and strive for the best possible results. This type of pay is usually some kind of financial bonus, but it can also be a non-monetary incentive.
Now, incentives can be classified into casual or structured (TalentLyft, 2019). Casual is a small token of appreciation for an outstanding performance and structured is giving a specific percentage of the achieved number of sales.
Economist George Baker notes in his 1993 article in the Harvest Business Review titled “Rethinking Rewards,” “The problem is not that incentives can’t work but that they work too well.” This means that incentives can be controlling. If politicking, teamwork, or individual work is rewarded by incentives then that and only that will be the outcome. Employees will only focus on what they will be rewarded for. Baker believes plans that are contingent on behavior will encourage the prescribed behavior and stifle initiation. However, plans that reward desired results are likely to stimulate innovation (Baker, 1993).
As a company is building their compensation plan, they will need to take into account the company’s size, financial position, industry and objectives. They will also need to consider the market salary data and level of complexity involved in finding the right talent (Diard, 2019). The compensation plans can be built through 7 steps.
Step 1 – Before you can work out how to reward the employees, you will need to work out the basics. The plan will need to address the who, what, and why.
Step 2 – The company will need to figure out how much and why. Giving away can be detrimental to the company and too little can make it hard to find suitable and qualified employees. Also, decide on how often the company will be awarding compensation therefore the company is not giving benefits away to often.
Step 3 – The compensation plan should represent all functions in the company. The package should not only include manager level but also entry level on up to the top. The lack of appreciation will result in a decrease in motivation and work output by those who do not receive recognition for their effort (Diard, 2019).
Step 4 – Research on the competition and see how much their compensation package pays. The company may want to increase theirs. This will encourage employees to stay and may also help with recruiting new employees from the competition.
Step 5 – A company needs to continually review their compensation plan. This way the company is still keeping up with the current market conditions. This plan should also be promoting compensation policies that are equitable, transparent, and perceived as fair by employees (Diard, 2019).
Step 6 – The company will need to make sure the goals are achievable. Unattainable goals are demotivating, especially if employees try their hardest to achieve them, maybe putting in many overtime hours and burning themselves out in the process. Always set the bar high, but not impossible to reach.
Step 7 – The company should invest in job analysis. Be specific about what every position in your company entails as this will be the foundation for your compensation plan (Diard, 2019). The company should research, job description, and job specification for every role in the company.
Baker, G. (1993). Rethinking Rewards. Harvard Business Review. Retrieved from https://hbr.org/1993/11/rethinking-rewards.
Brickley, J., Smith, C., & Zimmerman, J. (2016). Managerial Economics and Organizational Architecture, 6th Edition. New York, NY: McGraw-Hill.
Diard, A. (2019). Create a compensation plan in 7 steps. Referenced from https://blog.peoplespheres.com/create-a-compensation-plan-in-7-steps.
TalentLyft (2019). What is Incentive pay? Referenced from https://www.talentlyft.com/en/resources/what-is-incentive-pay.
Two: In most organizations, compensation is based on the review and evaluation of the various roles performed across the organization. These roles are benchmarked against comparable roles in the marketplace. The benchmark model considers differences in the working conditions across roles (Brickley, Smith, & Zimmerman, 2016). Organizations committed to attracting and retaining the best talent in the workforce focuses on pay for performance and total compensation. The compensation plan is more effective if it is aligned with the company’s goals and strategy. Supporting successful payment for performance culture requires a philosophy that ensures there is pay differentiation for employees. A successful and effective compensation program has to consider critical elements and sub-elements. These include job evaluation, partnering with line management, co-ordination of a rewards and recognition program, annual promotion process, development guidelines, and compensation studies internally and externally to ensure areas within the organization are structured so they can increase performance outcomes. Employee recognition is critical in the success of the organization’s compensation program to build and strengthen its success and creates a culture that retains and attracts the best talent.
Baker discusses the problem is not that incentives can’t work but that they work all too well. Compensation programs that result in negative behavior being rewarded may produce unwanted results (Stewart, et al., 1993). In Khon’s analysis, he suggests that managers should leverage the capabilities of the incentive programs to maximize effectiveness and build engagement across the organization.
Retaining and attracting top talent is an issue most organizations face in a competitive marketplace. Today’s organizations are going head-to-head against the most significant players in the industry. Organizations and, most specifically, the Human Resources group within the organization has to have a clear vision and knowledge of the talent landscape, and a strategy on identifying and cultivating diverse talent. Along with a plan to attract and retain candidates who possess the skills to succeed in a diverse and varying environment, a well-developed compensation program that is targeted at all levels of the organization is required. A well-developed plan should focus on salary for a competitive marketplace and align salaries (fixed pay) with employee’s roles, experience, locations, and local labor requirements. Bonuses or incentive pay should be incorporated into the plan as a method to recognize and award employees for performance. The incentive compensation should not be communicated as an entitlement and should vary based on factors such as employee and the organization’s performance to ensure it works effectively. Compensation plans should not be communicated or developed as monetary programs only; organizations should factor in total rewards to include, healthcare, flexible working programs, available company resources (education, training, third-party services), and retirement plans.
Brickley, J. A., Smith, C. W., & Zimmerman, J. L. (2016). Managerial Economics & Organizational Architecture (Vol. 6th Ed). New York, NY, United States: McGraw-Hill Education.
Stewart, B., Appelbaum, E., Lebby, A., Amabile, T., McAdams, J., Kozlowski, D., . . . Baker III, G. P. (1993, December). Rethinking Rewards. Havard Business Review.
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