Questions to ask while designing Employee Incentive Schemes

Performance Incentive Schemes have all along been considered an important tool in the hands of the management, to differentiate between high performers and others, and to suitably reward the former. Where the overall output is dependent on employee group efforts, typically seen in manufacturing environment, group incentive schemes have been considered appropriate. Where individual performance matters, as it happens in some of the Software Services Organizations, Individual Incentive Schemes are popular. I am aware of a Group Incentive Scheme which brought a turnaround in a manufacturing unit. I am also aware of overzealous attempts to realize too many goals through incentives which lead to unmanageable situations. The scheme could not get the “buy-in” of the employees for whom it was meant. In one instance where the organization wanted “margins” to improve, gave additional incentive for “margin improvement” and doled out more money than what the organization gained through such higher margins!

Key messages are: 

i. Keep it simple

ii. Ensure that all stakeholders trust the scheme,

iii. Base it on  data that is quantifiable and

iv. Make prompt disbursement of amounts worked out according to the declared scheme.

We need to know the right questions to ask.

Some of the questions that we need to ask while introducing an incentive scheme are listed here.

1. How many people and at what levels do we want to cover under the Incentive Scheme?

2. What percentage of their pay could be their Variable Pay?

3. In absolute amount, what could be this amount, for the entire organization, at 100% achievement?

4. Do we classify employees into “line” and “staff” functions for this purpose?

5. In the case of “line” what are deliverables? Are they different for different groups like “Sales” and “Project Delivery” teams?

6. Is it Company Level Incentive, Department Level Incentive or Project Level Incentive?

7. Are deliverables clearly defined and are capable of assessment without ambiguity or uncertainty?

8. Do we have data available from authentic sources, and methodologies available for processing such data?

9. Is there a target setting process in place?

10. Which are important? Individual targets or group level targets?

11. Are there any “Key Performance Drivers” (KPIs) like “Gross Margin” which we want to  achieve through the incentive scheme?

12. Are such KPIs within the control of the employees whose incentives are impacted?

13. In relation to point 11 above, out of incremental gains to the organization, how much do  we want to pass on to the employees as incentive?

14. Do we like to make soft skill aspects like “job knowledge”, “team work” part of the criteria, for assessing performance?

15. What is the periodicity of disbursement, monthly, quarterly or annually?

16. Can it be done within a reasonable time, after closure of the period?

17. Do we like to carry forward a part of the incentive earned by an employee, for disbursement in future?

18. Do we like to link the incentive earning to the physical presence of the employee, on duty?

19. How do we want to handle support staff?

20. Finally, can we keep it simple and unambiguous, such that it inspires confidence amongst the employees for whom it is meant?