Do You Really Need All Those Incentive Plans?

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Jun 18, 2019

It’s a fact. Left on their own, with no boundaries or constraints, incentive plans will often multiply like rabbits I once spoke with a compensation professional who claimed her organization has over 300 incentive plans in place. Her question: “What can we do to tame this beast?”

A few thoughts come to mind.

First of all, should the organization be managing 300 separate incentive plans?  Without knowing enough about the organization, its size and nature, and the objectives and contexts of all the plans, it’s difficult to tell if this is an appropriate number. But it’s a big enough number — and the administrative requirements associated with it steep enough — that it is a question worth asking.

A very basic tool and process that I find helpful in addressing this question at client organizations is something I call a “reward plan matrix.” Essentially, it is a table we complete in inventorying and assessing the different plans that the organization has in place.  My version has seven columns across the top, and I complete a row (typically in Excel) for every plan I discover. My columns are:

  1. Plan name
  2. Plan purpose or objective (in just a few words, why it’s there, what it should accomplish)
  3. Number of employees eligible
  4. Number of employees who received an award in the most recent plan period
  5. Median award amount
  6. Total award payout dollars
  7. How well the plan appears to be meeting its stated purpose or objective (a brief statement, perhaps with a letter grade)

Obviously this is an exercise that takes  time if you are looking at a couple of hundred plans. It can, however, be invaluable in helping your organization get its arms (and head) around what it is doing with incentives and whether there appears to be a solid return on investment for the incentive dollars being spent.

Additional benefits of taking this inventory include:

  • Determining exactly how many plans are in place (the last time I did this, the client believed there were about 40 plans but we discovered 120).
  • Discovering where there may be plans operating at cross-purposes (this happens way more than you’d think).
  • Clarifying the total dollars that the organization is spending on incentive compensation overall. (I have found this number to be an effective top management attention-grabber.)

I realize that in many organizations, various divisions and departments are encouraged to design and manage their own incentive plans as part of an effort to promote an entrepreneurial esprit among the ranks. I appreciate the value of this; however, allowing this much flexibility also creates huge opportunity for misalignment, double-dipping and a general loss of fiscal control.  For this reason, I am an advocate of getting a grip on the incentive beast!

In summary: Effectively designed and managed incentives = GOOD.  Out of control incentives and incentive spending = POTENTIALLY VERY BAD.

Good luck in taming your incentive beast!

This article is from the archives of CompensationForce.

Image by Andrew Martin from Pixabay

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