Written by Connor Harrison
August 28, 2018
Providing monthly, quarterly, or annual short-term incentives to employees can – when administered correctly – drive engagement and retention.
There are a whole range of short-term incentive plans (STIPs) that your organization should consider offering to optimize the employee experience, but here, we will hone in on performance sharing plans and individual performance-based plans, and explore some of the standard metrics and measurement methods that dictate payouts. Employees are more willing to work towards larger goals if they are part of a group. Therefore it is often beneficial to reward bonuses that advance the goals of the entire organization, with consideration given to individual contributions.
Performance sharing plans focus around specific improvement goals for the organization, and reward employees based on how much improvement is made on these goals within a certain period of time. These incentives foster a sense of unity among employees, and engage teams to work towards one set of organizational objectives.
Individual Performance-Based Plans
Of course, some employees might have a stronger influence on final performance outcomes than others, so it is prudent to also use incentive plans based on individual performance. These plans are often based on predetermined, measurable business objectives (MBOS), or can be output-based. Output-based plans work best for employees in a manufacturing or processing role who have more independent control over the pace and quality of their output. In sales roles, on the other hand, employees might receive a commission incentive for each unit of sales made, usually calculated from the sales revenue, a percentage of the total profit, or as a set award value per unit sold.
Given the importance of both team-based and individual performance goals in rewarding and engaging employees, many organizations have adopted ways to calculate the total payout based on both. This method is known as a merit matrix. And no, we’re not talking about the 1999 Keanu Reeves movie.
Some organizations use a 2 X 2 payout grid with individual objectives on one axis and a corporate goal on the other. Under these types of programs, the actual award can range anywhere from half the target to double the target – or nothing.
In some programs, broad organizational targets may need to be met for any employees to receive an associated bonus. For example, the organization may need to meet a certain minimum net income, a certain level of customer satisfaction, or a certain competitive position in the market.
When the number of goals includes many variables reflecting not only the employee’s primary responsibility, but also how they manage their relationships and broader goals throughout the organization, their bonus grid becomes what is known as a “balanced scorecard.” This approach is becoming popular as organizations recognize the complexity of a position’s overall contributions, and want to evaluate its performance holistically rather than from only one metric.
As we discussed, incorporating both group- and individual-based performance bonuses can help mitigate some concerns related to “fairness” in payout and employee influence over the results, but other challenges may still arise when implementing these short-term incentive plans.
Every organization has their own systems for calculating and rewarding short-term incentive payouts. Deciding which short-term incentive plans are right for your organization vary widely depending on your business, organizational goals, and how you want to motivate and evaluate your employees.
Download our white paper to further understand how organizations across the country are using market data, internal analytics, and strategic communication to establish an equitable pay structure.