By Claudine Kapel
Have you ever frowned at a news item about how much someone, somewhere, has earned as a bonus?
Such stories tend to spur questions about who gets incentive awards – and for what. While such questions can fuel interesting conversations over coffee, they’re even more valuable when used to help organizations reflect on their own compensation programs.
A case in point is a Canadian Press report that Ontario’s cash-strapped government will review its performance bonus plan, covering managers in the Ontario Public Service. The bonus plan drew attention after it was reported that nearly 98 per cent of eligible managers earned bonuses in 2011.
In defining its compensation strategy, an organization should address some fundamental questions regarding its position on variable pay and how incentive plans, if utilized, will be managed.
What is the intent for the plan? What roles will be bonus eligible? What will the incentive opportunity be for target performance? And what measures and standards will be used to define the amount an employee will actually receive as a bonus payout?
There’s nothing inherently right or wrong with having incentive plans. They are commonly used to reward employees for contributing to the success of an enterprise through the achievement of specific objectives.
A key success factor, however, is to strike the right balance when defining the measures and standards to be used to determine bonus payments.
If the objectives are too hard to achieve, few bonuses will be paid out, and the plan will lack motivational value and credibility. If, on the flip side, the objectives lack any kind of stretch, the organization may find itself paying out significant dollars in bonus payments with little to show for such expenditures.
As a rule of thumb, incentive payouts should roughly track a bell curve over time. In most years, the plan should pay out at or around target. Occasionally, the payouts will be small or there will be no awards at all. And occasionally, the plan will pay out awards that reflect the maximum values possible.
Incentive plans should be reviewed regularly to ensure the measures and standards remain appropriate and to watch for any calibration issues. If a plan is consistently delivering maximum awards year after year, the organization may want to consider raising the bar on its performance expectations.
Another key – and sometimes overlooked – aspect of an incentive plan design relates to what conditions or circumstances will trigger the plan to shut down and not pay out any awards. Ultimately, organizations need to have dollars available with which to pay bonus awards.
While this may seem like an obvious consideration, issues with incentive plan measures and performance expectations are easily overlooked when times are good and an organization has the financial results necessary to fund incentive awards.
Issues with plan designs become more evident during lean times, when disconnects between individual goals and enterprise results are more visible.
The reality is employees can generally achieve qualitative individual bonus goals – such as those related to completing tasks or projects – regardless of how the broader enterprise is doing financially. And that can lead to disconnects between how employees earn awards and the organization’s ability to pay.
That’s why award funding, or how the organization pools the dollars needed to pay out incentive awards, is a key plan design element.
Although there are key principles that shape sound incentive plan designs, the reality is plans come in as many shapes and sizes as the organizations that offer them. But regardless of what design is used, there is value to periodically asking the tough questions, to ensure the plan continues to add value.
Claudine Kapel is principal of Kapel and Associates Inc., a Toronto-based human resources and communications consulting firm specializing in the design and implementation of compensation and total rewards programs. For more information, visit www.kapelandassociates.com.