How to Get the Right Payouts to the Right People – A Simple Checklist – Incentive Plan Design

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Incentive Plan Design – Success is in the Execution 

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Sure you’ve got your incentive plan in place, getting it executed on time and by the right people is the real key to success.It comes down to making sure all the key actions and deadlines are achieved in an orderly fashion. If any of those are missed, the payouts can get delayed or lost…and you’ll be caught up short.

The compensation professional’s role is to ensure that recommendations for individual payments are made and approved, then actually land in your employees’ pockets.

Whether you have software applications to support the process or you’re still using Excel, there remain a number of items on the checklist to cover.

The Checklist

1. Go over your plan document in detail. All of the “special” circumstances mentioned in the document have administrative consequences for you.

2. Make sure you have a knowledgeable contact in your Finance group who is set to provide you with the financial results of the incentive plan’s objectives.

3. In many cases, incentive plan payouts must be made by a certain date. Paste that date on all of your calendars and walls, and work back from there. If incentive payments require a management or compensation committee approval, ensure that you know that date as well.

4. If the incentive payments must be approved by a management or Compensation board committee, find out what summary and individual employee information they will require. Ensure that you are set up to provide that information right away, and keep it in retrievable form for when management inevitably makes changes to their original requests.

5. Have a contact in the Payroll department who knows what’s happening and can shepherd this special process through payroll. That individual should be familiar with all of the key dates and be able to tell you what Payroll needs, and when they need it.

6. If you have plan objectives with results determined outside of the Finance group, identify who is going to give you that information, and when.

7. If your incentive payments are based on target percentages of salary, which salary will you use?

There are rules and regulations that contribute to the determination of this field, especially for non-exempt employees.

  • Do you include overtime?
  • All W-2 income?

(We have a special field set aside in our applications for this salary figure because it is so commonly NOT the current annual salary for each employee.)

Remember the “Line of Sight”

This is a principle of incentive plan design saying that each individual employee in the plan should have a clear view of how his/her performance affects the incentive plan payout. It normally implies that the goals set for individuals in an incentive plan should be directly related to the organization’s objectives.

Communicating with Employees About the Plan

If your company has determined that they want their employees to fully understand their incentive payments, prepare a report format in advance that will aid in this communication.

  • Some companies lay out each incentive plan objective in these communications, with each result and how that result contributed to the employee’s payment.
  • This may include company finance results, sub-organization results and individual employee modifiers.
  • Know in advance how you are going to get those results into the report quickly (and prepare for last minute changes, as management is sometimes very sensitive about publishing this information!).Better yet, get management’s approval in advance on what you will tell the employees through this incentive communication.

If you are careful about following the checklist outlined above, those incentive payments will flow smoothly into employees’ paychecks on schedule. And when the results are communicated out to everyone, they will understand and appreciate how the payments were determined.


Note: This is easy to do in areas of the organization that have a direct effect on revenues. It is very difficult in “softer” areas, such as corporate staff departments. In the first case, it is critical that the organization’s goals be set judiciously, as everyone in these departments will throw themselves into meeting them. In the second case, where the line of sight is “fuzzy”, there is a big danger that management will create specific “measurable” goals that do not make sense to the plan participants.


INCENTIVE PLAN DESIGN QUIZ

If a department’s incentive budget amount is the sum of the incentive targets for its employees, how much is the overall budget for the department with the four employees shown below?

Employee Incentive Target Percent Incentive Salary
1 5.0% $50,000
2 10.0% $105,000
3 7.5% $76,000
4 3.0% $42,000
A. 6.375%B. $273,000

C. $19,960

D. 10.2%

 

 

 

Answer: (C) $19,960