Laying The Foundation For A Functional Incentive Plan

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24 May Laying The Foundation For A Functional Incentive Plan

Employee incentive plans can be among the most meaningful benefits that an employer can offer. This is because participants receive awards tied directly to their professional accomplishments or their organization’s success.

In addition, in a robust economy, the right incentive plan can serve as an excellent tool for motivating employees to go above and beyond their usual performances to keep up with demand or reach that next level of profitability. The problem is, these arrangements can seem simple in theory but become much more complex in practice. Here is how to lay the foundation for a functional incentive plan.

Three simple questions

Employee incentive plans generally have three standard characteristics. Think of them as answers to three simple questions:

  1. Why does the plan exist? Obviously, you are looking to stimulate behavior that encourages workers to attain individual or organizational goals significantly beyond their normal job responsibilities. But it is important to be as specific as possible. For example, a corporation might want to increase its earnings per share target and will pay eligible employees an incentive award only if that objective is met.
  2. Who can participate? Your organization may want to extend plan coverage only to employees who materially realize these defined goals. Unlike qualified pension and profit-sharing plans (which, under the Employee Retirement Income Security Act of 1974, companies must extend to all employees who meet minimum age and service requirements), annual incentive plans generally are not regulated by any one clear legal standard regarding who can participate. So, you could consider limiting participation to only full-time employees whose work materially contributes to meeting your organization’s goals.
  3. What is the reward? Provide a truly meaningful award for hitting targets. Clearly, there is little incentive for employees to work harder if the reward is insignificant, and, if your organization tends to perform steadily from year to year, you can revise the plan to reflect other changes that affect it — such as employee turnover, changes in income, and corporate tax rates.

Choosing your approach

Incentive plans can be informal or formal. If a plan is informal, there is typically no written documentation other than perhaps a memo or email setting forth the ground rules. This approach may be suitable for small businesses with just a few employees.

Midsize or larger organizations, however, should create a written document describing all the plan’s criteria, rewards, and restrictions. (Strongly consider having an attorney review the document to assess legal risk). Please contact us for assistance in tailoring an incentive plan to fit your organization’s size, objectives, and budget.