Best Incentive Compensation Programs
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Our company opened in October 2006 and we are wanting to develop a successful incentive based compensation program to encourage top performance. I've done quite a bit of research and the number of options out there is pretty overwhelming. I've found many choices, but can't seem to find anything that is a "best practice". Does anyone have experience with such programs, and if so is there anything that you would recommend? We aren't sure yet exactly what measurements we will use, but I'm assuming it will be tied to personal, departmental and overall company performance goals.
Comments
There is a new book out by several Hay Group experts, The Manager's Guide to Rewards: What You Need to Know to Get the Best For--and From--Your Employees that contains several examples of best practices and may be of some help to you.
The authors believe that incentive-based compensation is better than bonuses in terms of productivity and staff development if the objectives and measures are well communicated ahead of time, especially to line managers. Employees have to understand exactly what they must do to earn incentive pay so there are no surprises at year's end.
The statge of industry development is important when figuring out what compensation packages to create. For example, a new company like yours which is in the developing stage, will be focused on keeping fixed costs low and developing a market that will sustain long term growth. This scenario might suggest lower base salaries with greater emphasis on long term incentives and equity tied to performance measures such as increases in market share or customer base. There is more risk associated with working at a start-up company and typically the compensation package has a significant upside if the company is successful - eg. phantom stock options, bonuses tied to funding or a successful initial public offering. This focuses executives and employees on getting the company on its feet and profitable, and solidly links compensation to performance.
Any compensaton package should be designed for the individual company and not simply string together all the latest trends in compensation. Prior to designing or modifying the individual elements of the comp program, HR and comp professionals should meet with finance and marketing and the board to articulate business strategy. Then the comp program should support business strategy.
When we were determining what our comp packages would be we asked ourselves a bunch of questions:
Do we need a short-term fix or a long-term corporate strategfy?
For execs, should we have a single comp program that applies to all execs or individual packages?
What do our competitors do?
What is our current position in the marketplace with regard to comp?
What is the right mix of salary, incentives, benefits, and for execs perquisites?
We used short term incentives to reward employees for achieving goals within the year and pay this bonus on an annual basis. Our employees really felt like they were sharing in the success of the company. We used long term incentives for higher level employees - execs - to keep them working for us for the long term. It has worked. There is very little turnover compared to most companies.