In a simple management incentive plan there can be one of three key drivers:
- Volume based incentives (number of widgets sold)
- Revenue based incentives (topline)
- Profit based incentives (bottomline)
Each has strengths and weaknesses which must be considered before design and implementation. For instance, a volume based incentive plan may be incredibly easy to understand and implement, but it might not be effective in an organization with numerous products and pricing schemas.
A serious consideration for revenue or profit based incentive plans might include asking the question: Who controls the price or expense? If the manager has too much or too little control over these attributes, then the incentive might not be aligned with their ability to deliver.
In designing a comprehensive plan, an organization must also evaluate several other variables:
- Timing (monthly, quarterly, annually)
- Individual versus team incentives
- Base versus at risk percentage split
- Bonuses versus commissions
- Local, regional and national incentives
- Payout criteria
In general, an organization must determine if the plan design:
A) incents the expected managers behavior
B) aligns the managers with control over the outcome
C) can effectively measure performance
A properly designed and implemented incentive plan, when aligned with an effective performance development program and clear strategic direction, can not only achieve the organizations financial objectives, but also boost morale and encourage employee retention.
Photo credit to Luis Llerena