Incentive plans gaining traction in not-for-profits

Study highlights concerns about level of discretion in how payouts calculated

By Claudine Kapel

Annual incentive plans are a common part of the total compensation package in for-profit organizations, including publicly traded companies. But these types of plans are also becoming popular in not-for-profit and government organizations.

New research conducted by WorldatWork and Vivient Consulting found 78 per cent of respondents in not-for-profit and government organizations report having some sort of short-term incentive program. The survey results reflect responses from 175 U.S. organizations.

Among the organizations using short-term incentives, the most prevalent type of program is an annual incentive plan, which is used by 76 per cent of respondents. Other types of programs reported included:

  • Spot awards (42 per cent).
  • Discretionary (40 per cent).
  • Retention (38 per cent).
  • Team/group (23 per cent).
  • Project bonus (21 per cent).

While WorldatWork and Vivient have conducted research on the incentive pay practices of privately held organizations in the past, they note that in 2013 the number of not-for-profit and government organizations participating in the research was significant enough to warrant creating a special report for these organizations.

The research found not-for-profits are more likely to use short-term incentives (STI) than government organizations. Fully 82 per cent of the not-for-profit respondents report having an STI program, compared with 67 per cent of the public sector/government respondents.

Some 62 per cent of respondents with annual incentive plans report they have four to six measures in their plan. A further 21 per cent indicat they had seven or more measures in their plan.

Some of the most commonly used performance measures included:

  • Customer satisfaction (73 per cent).
  • Measures of surplus/revenue over expenses/income (67 per cent).
  • Service/quality (65 per cent).
  • Achievement of specific individual goals (43 per cent).
  • Operational efficiency (39 per cent).
  • Revenue/revenue growth (37 per cent).

When asked to rate the effectiveness of their annual incentive plan, only 16 per cent gave their plan the highest score on a scale of one to five. A further 66 per cent rated their plan as moderately effective. Plan elements most often cited as strengths included:

  • Performance linkage – corporate, unit, individual (75 per cent).
  • Type of performance measures (74 per cent).
  • Level of award opportunity (61 per cent).

Plan elements most often cited as weaknesses included:

  • Risk-reward tradeoff (74 per cent).
  • Level of discretion (63 per cent).

Defining appropriate incentive measures can be challenging in a not-for-profit or government environment. Ideally, measures will reflect key aspects of organizational performance to ensure incentive awards are being paid for meaningful – and measurable – achievements that help advance or fulfill the organization’s mandate.

The key is to be able to demonstrate incentive-related expenditures are delivering value for the organization and its stakeholders. To that end, it isn’t surprising that survey respondents identified level of discretion and risk-reward tradeoffs as key areas of concern.

If incentive payouts are discretionary, an annual incentive plan will have a more limited capacity to drive desired performance and results because employees will not be clear about what they need to do to earn an award.

If the incentive plan always pays out at the same level and awards are seen as almost guaranteed, then the plan will likely fuel an entitlement mentality and lose its capacity influence behaviour. Granted, in some environments, it isn’t always clear how one “raises the bar” on performance expectations year over year.

Incentive plans by their very design are meant to connect performance and rewards. And incentive payouts aren’t meant to be guaranteed. In fact, it’s typically expected that payout levels will vary year by year. That’s why such plans are known as variable pay.

Regardless of the type of organization you work for, if these fundamentals aren’t at play, your incentive plan may not be delivering optimal value.

Claudine Kapel

Claudine Kapel is principal of Kapel and Associates Inc., a human resources consulting firm specializing in compensation design, performance management, and employee communications. Claudine is also the co-author of The HR Manager’s Guide to Total Rewards and Straight Talk on Managing Human Resources.
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