When Is It Appropriate to Offer Incentives in a Compensation Plan?

Building an enticing compensation plan for your team can be challenging work. The plan must be impactful to motivate and inspire them to excel at their respective roles. Crafting an incentives plan that complements your compensation plan is equally important, but when is exactly the right time to start offering incentives?

In this article, we will outline what common types of incentives plan are in use by organizations. As well as this, we will walk you through when the best time is to implement an incentives plan into your compensation plan. Let’s begin by understanding what an incentives plan is and how it fits into your compensation plan.

What Does an Incentives Plan Look Like in a Compensation Plan?

The first step in properly understanding what an incentive plan looks like is to define the concept of incentives. To start, incentives are a special award, bonus, or prize that companies use to drive their employees’ motivation to achieve certain goals. For example, an employer may offer a cash bonus to an employee who makes ‘x’ number of sales in a week.

When determining whether incentives are appropriate for your compensation plan, you need to initially consider the needs and goals of your organization. This means assessing the different key performance indicators and milestones that matter to you. Consider your company’s values and culture when doing this too.

It is also vital to consider the types of incentives you’ll be planning to incorporate into your incentives plan. Cash bonuses, gift cards, extra PTO (paid time off), and many more are among the options. Once you communicate incentives to employees, be sure to regularly give them progress updates on how they’re doing. With the right approach, you will make the positive impact you desire.

What Are the Common Types of Incentives Plan?

Let’s look at the most common types of incentives plan in more detail. Choosing the right incentives is vital to your compensation plan, as it can heavily influence how you motivate employees. Common types of incentives include:

• Bonuses

An extra financial reward for the completion of work or meeting goals for employees can go a long way toward boosting productivity. Offering bonuses as part of an incentives plan can be useful for employers when workloads increase, as it encourages employees to meet goals. These bonuses need to be achievable; otherwise, they may dishearten employees.

• Profit Sharing

Some organizations choose to foster an entrepreneurial spirit by offering employees the chance to acquire a percentage of profits or revenue. This ensures that your employees will invest in your company’s success while you repay them for their work. When profit sharing is part of an organization’s culture, it can lead to employees collaborating more effectively to boost the bottom line.

• Extra Paid Time Off

Offering extra paid time off as part of an incentives plan shows that you value your employees’ work-life balance. This is an appealing incentive for obvious reasons, and many employees will value this over a monetary bonus. After all, time outside of work is valuable, so you want to make the most of it when you get it.

• Non-Monetary Rewards

Non-monetary incentives can include public recognition, opportunities for growth, flexible work options, learning and development programs, and more. Incentives differ from person to person, so it is vital to tailor bonuses to your employees’ needs. Pathways for career progression are valuable to many employees, so make sure to invest in their future.

It’s evident that incentives can be monetary or non-monetary, which you can use to reward your employees. When implemented effectively, these plans can boost employees’ full potential and productivity. If you get your incentives plan right, you will have a workforce that fully commits to your mission.

When Should You Implement an Incentives Plan?

Knowing when to implement an incentives plan is a skill that employers need to possess. You need to find an appropriate time to determine when incentives should kick into effect in your compensation plan. Here are some pointers for you:

• For Routine and Repetitive Tasks

Employees may find it dull to engage in routine and repetitive tasks. Offering incentives can motivate employees to engage and be productive in these tasks. Sometimes employees need a push through a monotonous task, and an incentive can help you do this.

• To Encourage Exceptional Performance

It is often the case that some work requires creativity, problem-solving, or goes beyond expectations for employees. An incentives plan can inspire your employees to achieve more. In times like this, incentives can act as an extra reward for strong performance.

• When Goals Become Challenging

Some targets and goals can prove to be especially challenging for employees. To provide extra motivation, an incentives plan can be put in place to encourage them to put in the work. You can get the results you desire if you make it worthwhile for employees.

The key is to use an incentives plan strategically to support your goals. If you link an incentive plan to relevant work, employees may be more motivated to work hard. Use caution when utilizing incentives excessively, however, since it may have the opposite effect of what you intended if employees choose the incentives that are most important to them.

The Downsides of Using an Incentives Plan

Implementing an incentives plan into your compensation plan doesn’t always bring good behavior. As this is the case, it’s useful to be aware of the potential downsides that can present themselves.

Firstly, you may find that an incentives plan encourages short-term thinking. This means that employees are primarily making decisions on what can help them get a reward the quickest and easiest way. This may result in them taking actions that are beneficial in the short term but not in the long term.

Incentives can also foster rivalry, particularly if incentive compensation relies on performance relative to peers. With internal competition and rivalries, employees may focus more on outperforming their colleagues than what’s best for the organization. When this occurs, it can damage the workplace culture and trust between employees.

Another downside to mention is that an incentives plan can end up being expensive for your organization. If incentive payouts have a major impact on an organization's budget and revenues, it may be time to reassess the amount you spend on incentives. That said, employers must strike a balance between appropriately rewarding employees and budget restraints.

Final Thoughts

You should now have a clearer understanding of when you should implement an incentives plan into your compensation plan.  Incentives need to be affordable and effective enough to engage and inspire employees to meet their goals. They shouldn’t be put in place of salary and management, however.

The key is to find which incentives plan will work best for you and your team. Consult your staff and ask them which incentives they prefer. If effective, they will thank you, and you will have a workforce that fully commits themselves to being the best they can.