Incentive Plan Design and Variable Pay Trends in Small Business
One of the main factors that contributes to the United States being a world super power is in large part due to its economy. While in recent years the US economy has suffered major setbacks and the deterioration of many industries due to offshoring and certain product lines becoming obsolete, the broader economic landscape has been a world leader for well over a century.
Economic gains for corporations, and individuals alike, are strongly linked to the financial and overall business performance. In order to realize consistent financial gains and strong business results, employee performance must align to corporate and strategic goals and initiatives.
One of the most effective ways to ensure company performance is sustained and primed for growth, is to design and implement a variable pay program that links employee performance to bottom line success.
How Other Small Businesses are Approaching Compensation in the Market
I had a chance to catch up with my compensation consulting colleagues at Helios HR recently, and they were eager to know more about the current landscape of compensation and incentive plan design, specially in the small business market. Here are some of the questions they had below.
Q: What types of compensation trends are you seeing among your small business clients?
A: The first trend I am seeing is that all of my clients, regardless of industry, are seeking to design some form of variable pay program. The second trend I am seeing centers on why leaders are seeking to design, develop and implement variable pay programs. Simply put, leadership endeavors to align employee performance to the mission, and subsequently, desired financial outcomes that are tied to bottom line performance. The third trend I am seeing, are variable pay plans that are tied directly to the employee’s performance instead of a broader company metric. The final, and probably my favorite trend, is leadership’s desire to make discretionary adjustments to the final payment, up or down, to account for the intangibles.
Q: What are some of the unexpected outcomes businesses are reporting once variable pay programs are implemented?
A: On a very broad level, employee engagement is much improved once variable pay programs are designed and implemented. When employees are more aware of the mission and how their performance directly impacts divisional or corporate success, the deeper their bond is with organization’s success. Similarly, employees have a clearer understanding of their purpose and how their talents fit into the landscape of the organization. Incentive plans assist employees with truly knowing how to direct and focus their skills and abilities. I believe people gain a better understanding of their purpose within an organization when annual goals are clearly defined and tracked over the course of a year.
Q: Are incentive plans impacting any other functions of the business?
A: Yes, first and foremost, recruiting departments and the ability to attract and hire top talent. Incentive plans are an incredible tool that assist recruiters and hiring managers with attracting top talent to the organization. High performing and results-oriented professionals are accustomed to receiving both base and variable pay, and have those same expectations when looking at new opportunities.
PayScale reports 71% of organizations offer some type of variable pay program, that number is even higher among top-performing organizations. From what I can tell in the compensation consulting world, variable pay programs are not going anywhere anytime soon.
Variable pay programs are also beneficial for managers supporting team members. When employees are tied to performance-based incentive payouts that are market informed and competitive, your top or strong performers have a tendency to remain at the organization, and it provides lower performing employees with a roadmap to help course correct performance-related issues. On an even broader scale, the entire business is positively impacted by variable pay programs so long as they are aligned and geared towards the true drivers of success.
Q: Anything else going on that's important to share about variable pay programs?
A: I believe well designed and highly effective incentive plans are impacted by the voice of the executive and tend to be very mission driven, have a direct and clear line of sight between the employee and the business driver, and is well documented and communicated.
The design of an incentive plan can take an unexpected amount of time and requires input from other team members. I suggest companies get a head start on the design and communication of their programs and do not leave this task until the third or fourth quarter. The details of the incentive plan should be nailed down no later than the Q3 with a formal plan roll out toward the middle to later portion of Q4.
In sum, when organizations are led by enlightened leaders who recognize business success hinges on employee performance and its overall human capital strategy, they many times look to variable pay program to optimize this relationship.
While designing a full-scale incentive plan is an extremely rewarding experience, all of that work can quickly become useless if the information is not properly introduced to pay impacting managers and plan participants. The adoption of such a program is highly dependent on an effective communication plan and several meaningful touch points to assist with implementation.
When done right, the benefits and rewards are mutually beneficial and to both the company and the employee.