Incentivising performance

29 March 2018

When designing effective incentive plans the research is clear: More and more organisations rely on incentives of some nature to drive employee behaviour. However, the question is – how do you ensure that your incentive plan is driving the type of behaviour you want to see?  

There are some key factors you should be thinking about when you design your Executive Incentive scheme.

Where to start

Many factors will come into play when you are deciding on the delivery mechanism for an incentive. Do you want a short-term incentive that rewards past behaviour, or a more extended ‘tie in’ that encourages longer-term thinking and acts as a ‘golden handcuff’ to keep employees with the business?
Other factors that come into play are the tax implications of different incentive schemes. These should be considered upfront in the design phase.

You should also aim for simplicity whenever possible - the more complex your scheme is, the less likely it will be seen as a motivational tool.

Defining value

How much do you need to pay? We have found that what is important to many executives is not always the pure dollar amount of an incentive. More often, it is how that amount compares to the incentive values offered to other executives.

This may come down to a ‘measure of worth’ - and for those motivated enough to get to a senior executive role, their competitive nature often requires that ‘worth’ be higher than their peers before it will have real meaning or value.

Benchmarking your incentives so that you understand and can communicate the relative value of an incentive will be an important aspect of setting up or refining your incentive program and your communication.

When you are considering the ‘how much’ question, it is also important to understand that different incentive mechanisms will be valued differently. Immediate payments like cash are often valued more than incentives with a longer timeframe such as shares or share options.

Choose your KPI’s wisely

The old adage of ‘what gets measured gets done’ is never truer than when you are looking at managing incentives. In our experience, getting the KPIs (Key Performance Indicators) right is the hardest part of developing an incentive scheme, and often receives the least amount of attention. Companies rarely do this well.

Simple measures of performance, revenue, net profit, etc. will generally drive the short-term results you might be looking for. However, they may also encourage behaviours that are completely at odds with what you want to achieve for the longer term.

Setting KPIs that not only achieve the bottom line results you are looking for, but also help to drive the culture you want to achieve, is an art - and one that is critical in getting the best results from your incentive program.

A good incentive scheme needs to be well thought out and even modelled at the beginning. You generally only get one shot at communicating and delivering a new incentive scheme to your executives. Get it right, and you may have a tool that helps to drive performance. Get it wrong, and you may well put something in place that is at best undervalued by employees, and at worst may drive the wrong behaviours or decrease your executive’s intrinsic motivation to perform.