Incentive Plan Review and Design

Foundations Consulting often reviews incentive plans to assess
alignment with organizational business goals, culture and
compensation strategy. Essentially, we want to determine if the
incentive plans motivate the right behaviors and results.

Incentive Plan Purpose

The review process starts by asking questions about the existing plan and how it is operating. A great place to start is to explore the purpose of the incentive plan and the extent to which the plan is achieving that purpose, using the questions below.

What is (or should be) the purpose of the incentive plan?  

If the purpose is to:

• Do incentives vary in amount as organizational performance varies year to year?
• Do employees understand the link between organizational success and incentives?

• Do employees understand the goals and what it will take to accomplish them?
• Do employees know what they, individually, can do to positively impact the goals?
• Are the goals clearly communicated at the beginning of the incentive period and is progress toward the goals communicated on a regular basis?
  

• Is the team clearly defined?
• Do all team members have the ability to impact the goals?
• Do team incentives result in weak performers receiving the same/similar incentive as strong performers?

• Is the organization skilled at measuring individual performance?
• Do incentives vary meaningfully between high and average performers?

Incentive Plan Compensation Level

The next step in assessing incentive plans is to understand the relationship of internal compensation to the market, and what role incentives play in that relationship.

The three scenarios below compare base salaries and incentive amounts paid and how organizations may shift their compensation dollars moving forward.

In some situations, all three of the scenarios outlined above are present in one organization. This requires the development of clear criteria to determine what types of incentive changes are made for specific jobs or functions within the organization.

Incentive Plan Strategy

Once the current incentive plan is understood, it is time to shift attention to what changes might be beneficial.

It can be helpful to ask senior leadership what’s on their incentive plan wish list. Foundations Consulting finds that leaders often look for:

• A simplified plan that is easier to explain and administer
• A reduction in the number of performance metrics included in the incentive plan
• Greater differentiation in incentives based on individual performance

When a new or revised incentive plan has been defined, it is important to understand the impact of the incentive plan on individual and group compensation. Modeling the plan based on prior years’ performance and anticipated performance parameters is critical to identifying and addressing any unintended consequences.

Foundations Consulting recommends taking multiple approaches to the modeling to ensure potential impacts of changes are clearly understood.

Well-designed incentives can drive and reward individual, team and/or organizational performance while providing market competitive compensation to employees. Time spent assessing incentive plans to ensure they continue to support the organization’s business goals, culture and compensation strategy is time well spent.

Contact Us

Contact Beth Ostrem or Amy Ryan for more information.