83 per cent of organizations use short-term incentive pay
A strong majority (83 per cent) of Canadian organizations use short-term incentive pay plans for at least some employees, but 69 per cent said they are unable to assess the cost-effectiveness of these plans. That’s according to a recent report by the Conference Board of Canada, Making Short-Term Incentives Work for Your Organization.
“Determining an approach for measuring plan effectiveness remains a topic of debate as boards and senior management become increasingly interested in this form of compensation,” said authors Amanda Holmes and Eric St-Jean.
“With a significant portion of an employee’s remuneration coming from incentive pay, it remains critical to identify a link between the short-term incentive pay plan and business outcomes to ensure the organization is investing its money effectively.”
The most common objective of a short-term incentive pay plan is to drive organizational performance (76 per cent), followed by linking individual performance to corporate performance (63 per cent) and driving individual performance (56 per cent), found the survey of 130 organizations that have at least one short-term incentive pay plan in effect for employees.
Those employers that do measure the success of incentive pay programs often rely on multiple measures and frequently look to corporate results to prove the plan enabled them to achieve business objectives, found the Conference Board.
“Although these programs offer many benefits, they also add complexity on many fronts,” said Holmes and St-Jean in the report.
“When designing a program, organizations must consider multiple factors if they are to develop a successful incentive pay program. Successful plan design requires a delicate balance between having a competitive compensation package, keeping employees motivated and running a cost-effective program. Achieving this balance will become increasingly challenging as work environments continue to evolve.”
When it comes to the performance metrics to include in the plan and the target level of performance, the most popular are corporate-wide measures of performance (82 per cent) followed by individual results (74 per cent).
“Using corporate results simplifies the process of measuring actual performance against goals because payouts for a large percentage of employees will be determined based on a small number of calculations,” said the report’s authors.
“However, the use of individual results can be a powerful tool in building a performance culture because this can clearly articulate and reward superior performance. Also, average performers can see how improvements to their personal contribution can lead to additional compensation.”
The most significant factor affecting target payouts is an employee’s level within an organization.
Payouts for senior executives averaged 45.8 per cent of their salary (or close to $150,000 per employee) compared with 7.3 per cent for clerical and support staff (about $3,500 per employee).
Slightly more than one-quarter (26 per cent) of responding organizations include all employees in the primary short-term incentive pay program, found the Conference Board survey. One-half of the organizations indicated they use job grade to determine program eligibility while 23 per cent use job family and 18 per cent use employee status.
