EMPLOYEE PERFORMANCE INCENTIVES

January 28, 2008
Written by Aina DeViet
While we all know it takes more than competitive pay to attract and retain staff, and keep them engaged and motivated, an important part of the ‘reward equation’ is compensation. Today, many employers use a variety of reward strategies including monetary incentives to differentiate themselves from their competitors and to gain a competitive advantage in a difficult labour market. Profit sharing and gainsharing are two well-known examples.

Companies, large and small, face challenges both attracting and retaining good employees. It used to be simple – an employee worked a number of hours for a predetermined rate and took home a pay envelope at the end of the week.

While we all know it takes more than competitive pay to attract and retain staff, and keep them engaged and motivated, an important part of the ‘reward equation’ is compensation. Today, many employers use a variety of reward strategies including monetary incentives to differentiate themselves from their competitors and to gain a competitive advantage in a difficult labour market.

In this article, we’ll look at some of the things to keep in mind when developing an effective incentive pay plan.

When considering monetary incentives to improve performance, you’ll need to select a plan that reflects the values and the objectives that are important to your company. Second, identify the right performance measures – financial, operational or customer service – and ensure the targets are ambitious but still achievable. Performance measures must align with your business strategy and must reinforce the business targets that drive success in your business.

You’ll also have to determine how to measure performance. Some goals will be short-term and others will be long-term. You’ll need to be clear about what improvement is in each case and this means you’ll need to know where you are starting from – the baseline – and know how to get the improvement data.

It’s also important to communicate the plan and reinforce the links between the goals, measures and behaviour on an ongoing basis. If employees can’t see how they impact or influence a measure, and how it ultimately ties in with goals, the plan won’t make sense to them.

 Let’s look at two well-known examples of monetary incentive plans – profit sharing and gainsharing.
Employee profit sharing plans are quite common. Essentially, these plans share a “slice of the pie” with employees and are based on a measure of an organization’s profitability. Normally a cash payout is made annually and is funded from profits.

With this type of plan no employee involvement is required to design or implement the process. The drawback is that, for many employees, it is difficult to make the link between their personal daily activities and the cash they get at the end of the year.

When the link is weak, there is little impact on employee behaviour, and often the bonus simply becomes an entitlement. On the other hand, when employers make an effort to ensure employees understand how their contributions affect the company’s bottom line, the results can be very impressive.

Gainsharing is often confused with profit sharing, but beyond the fact that employees earn a bonus under both plans, the two are very different. The goal of gainsharing is to “increase the size of the pie” and is based on operational measures that may include productivity increases, cost reduction, quality improvements, or customer service. A payout occurs only when performance of the selected measures exceeds the predefined target, and is self-funded from the savings that result from improved performance.

A key characteristic of a gainsharing plan is employee involvement in developing and communicating the plan, which makes it easier for employees to understand how their behaviour impacts the measures that are the focus of improvement.

Profit sharing and gainsharing are only two options you may consider. Other plans focus on individual or team incentives. The important thing to remember is that when designing a plan, you’ll need to ensure the plan you ultimately implement is aligned with your business philosophy, your principles and your business strategy and objectives. The best plan for each firm is different, and ultimately you may want to take parts of different alternatives to create the plan that fits your needs.

Next month, we’ll take a look at some examples of non-monetary incentives and how you might use these to reward your staff.

Aina DeViet is with Deloitte’s Southwestern Ontario Consulting practice. • 519-640-4653, This e-mail address is being protected from spambots. You need JavaScript enabled to view it

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