Since it involves achieving precise objectives and implies that a part of the salary cannot be taken for granted, incentive compensation is often seen as obscure and unfair for employees and risky for employers. So what’s the real story? Here’s a quick look at 7 common misconceptions about incentive compensation.
There are some give-away signs: if the objective related bonus system is complex then there must be something wrong with it. The first sign of a good incentive compensation scheme is legibility; it must be easy for employees to understand. Evidently, if it is based on company strategy it cannot be simplistic. However, incentive compensation must cover only two or three of the company’s strategic pillars, and no more. As soon as an employer tries to use the incentive compensation scheme to cover all of their strategic axes it immediately becomes unnecessarily complex and therefore fragile. The important thing is to select just two or three strategic pillars and stick to them.
By setting up an incentive compensation scheme, the company must have three years of business activity in their sights. The point is to situate the performance objectives within a reasonable and doable timeframe. In this way the incentive compensation scheme will have no reason to be modified during the two or three years in question. Of course certain indicators can be changed but this does not alter the foundations of the scheme. The bonus scheme must remain stable unless the company is forced to completely overhaul its strategies on a regular basis, which is very rare.
If you do not have the right tools, setting up an incentive compensation scheme can be long, painful and end up being a waste of time. The main thing is to select those performance indicators that provide data the most regularly. If the scheme is too complex from the start, setting up will clearly take too much amounts of time. Using the right software will allow you to constantly recheck your calculations and avoid error. For example, using software like Excel to calculate bonuses can be a very bad idea. Outsourcing bonus calculations can help you to stay focused and avoid investing too much of your own time setting up your incentive compensation scheme.
If the performance objectives defined by the company hold back overall performance, then the bonus scheme will need a complete overhaul. If the business sector requires collaborative working behaviour, it will evidently be possible and useful to set team objectives. Additionally, it is absolutely essential to select the type of incentive compensation depending on employee profiles and company strategy. For example, the more ambitious and entrepreneuring employees might prefer to work on a commission basis. But individual commission is not at all a good idea as a reward for completing complex sales that require the joint effort of a number of people in different roles. This is where collective objectives should be preferred, which could eventually be associated with individual bonuses. And it is crucial to use the right calculating tool and decide on individual or collective bonuses depending on need.
The incentive compensation scheme must cover all of the regulatory systems and could very well be customer satisfaction oriented. It would be completely wrong to think that only companies which exist purely to make money could possibly benefit from an incentive compensation scheme. In fact, they have now spread to cover all professions and business sectors. Incentive compensation is now also proposed for support roles in private sector companies as well as the civil service. Why? To attract interest in professions with recruitment shortages and keep staff in place longer. Additionally, some NGOs and non-profits are now using incentive compensation to generate performance and motivation for the greater good.
One of the advantages of incentive compensation is that it means that employees can be rewarded in direct relation to global performance. If it is quite logical that sales operatives benefit from bonuses related to their performance, then the introduction of a variable part in the pay structures of support operatives is just as logical. The important thing when it comes to achieving the desired results is to select KPI that account for the positions and profiles of each employee.
There is no doubt that the whole compensation issue is a source of stress. It’s quite simple: their function is based on creating tension. And the quality of working life can indeed be affected. But this only really happens if the defined objectives are not reasonable, badly identified or just not possible. In this case, the stress will become so great that the employees will largely just give up on the idea of getting the bonuses. However, it is also very important to point out that the implementation of objective-related bonuses will contribute directly to a feeling of recognition amongst employees. Quality of life will be improved if the employees are sure that they will receive fair pay that matches their efforts.
A correctly configured incentive compensation scheme that has been put together using the right tools incorporating a reasonable number of the company’s strategic pillars as well as allowing for employee profiles and aspirations can only generate more motivation and greater performance. On the other hand, if a system has not been properly thought through, using only vague objectives and based on a totally arbitrary creation process, it will do nothing more that generate inequalities, waste time and be counter-productive. As far as incentive compensation is concerned, it is therefore very important to take the time to think things through and work on constructing the bonus scheme with the best possible impact which will also carefully preserve the quality of working life.