Are Your Incentive Pay Plans Working for You?

March 30, 2017 Chris Kelley

Variable Pay Usage Continues to Climb

Companies have been increasingly relying on variable pay plans for more of their workforce. And why not? When done right, a variable pay plan can deliver the best of both worlds.  We all want to incentivize employees to deliver the needed business results while keeping fixed costs (i.e., base pay) in check.  Our Salary Increase Survey has been tracking the growth in incentive plan prevalence over the past twenty years and the change is significant.  The average percent of payroll spent on broad based variable pay awards has grown from 7.5% in 1996 to 12.8% in 2016, for a 70.7% increase.

Percent-of-Payroll-Spend-On-Variable-vs-Merit.png

Perceptions of Plan Effectiveness Called into Question

Here’s an alarming fact. According to our Variable Compensation Measurement™ (VCM) survey, fifteen percent (15%) of companies reported in 2016 that the incentive pay plans for their broad-based employee population are either not effective or in some cases, causing harm. 

That 15% figure may not be so alarming by itself, but there are several trends going on that should make your ears perk up. When we look at the plan effectiveness question over the most recent five years:

  • The percent of companies rating their broad based incentive plans as effective, meaning the incentive plan has helped achieve business results, has declined by 4 percentage points (from 29% effective down to 25%),
  • At the same time, the combined scores for poor effectiveness, meaning had either no effect on business results or actually hindered results, have increased by 6 percentage points (from 9% to 15%).

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When we overlay these trends of plan effectiveness with the trends of increased prevalence of variable pay plans, it points to a real opportunity for compensation professionals to make a difference. Your business leaders are going to continue the press for the benefits of having lower fixed costs, but they want the variable pay plans to be effective at driving greater business results.

Fixing Variable Pay Plan Effectiveness

So how can you make sure your incentive plans are working in your favor? You should definitely take stock every year to evaluate how well your incentive plan has performed and make tweaks as necessary. It’s also a good idea to take a more holistic look every 3 – 5 years where again, you could make minor tweaks or perhaps more significant changes as needed to align with your pay philosophy and strategic business objectives. When doing these assessments, the areas of your plans where we find the strongest factors contributing to success are:

  • Executive / Management Support
  • Goals / Targets
  • Employee Understanding of Plan
  • Employee Ability to Impact Results
  • Effective Communication of the Plan

There are several more factors we look at, but those five consistently have the strongest ranking of factors that are driving the overall success of incentive plans.

To Learn More

The best insight on variable compensation plan design starts with participation in our annual Variable Compensation Measurement™ (VCM) survey. The VCM report provides a wealth of information about incentive plan design, plan mechanics, plan administration and more. Even more insights are available by using our Variable Pay Index tool which provides you in-depth diagnostics of your plan compared to a peer group of your choosing and a summary report prepared by one of our compensation consultants. You can request more information from your Account Executive by completing the Contact Us form.

 

 Making Your Variable Pay Plan Perform Better

 

 

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