Variable Incentive Plans: A Motivation & Retention tool

By: Tushar Bhatia
Date: April 6th, 2010
Posted in: Compensation Planning, Employee Rewards, HR Best Practices, HR Technology, Payroll, Performance Management | 22 Comments »

Since the past two years Variable Incentives did not work very well since most employees wanted the security of a high base-pay and meeting targets was largely unpredictable. The economy is on an up-swing again and employers & employees see new opportunities for increasing incomes.

Organizations want to curtail their fixed costs, hence salaries may not increase dramatically and immediately, but Variable Incentive Plans are coming to the fore to retain high-performers and encourage achievement.

As soon as we think of Variable Incentives, our thought goes to the employees in the sales department, but in my recent research I have found that each employee, irrespective of their department can be included in the company Variable Incentive Plan. Although the goals, their relative importance and the expected achievements may vary across job roles. The rest of this article explores the various categories of Incentives that can be applied to employees in different job roles and how HR can use this tool to motivate and retain employees across the entire company.

Typically each employee may get 5 – 10 different goals which determine their Variable Incentive Plan for the year (or in some cases even a month, quarter or half-an-year). Senior employees and those in the management positions would have a significantly higher weight for targets which are linked with the overall performance of the company or of their respective departments. For middle management positions, the targets would be based more on team performance and for junior employees the variable incentives will focus on individual achievements.

By giving multiple targets to each employee, there is a greater opportunity for earning at least some part of the Variable Incentives. This can act as a strong performance motivator and retention tool. It also enables identification of high performers who become eligible to enter the succession pipelines for key positions.

Types of Variable Incentives

The variable incentives can be broken down into multiple categories some of which are :

Performance Based Targets Each department in the company can have have specific performance related goals. Some of these goals could be: Company Top Line and Bottom Line (Revenues and Profitability): Can apply to all employees, though with varying weights. Departmental Goals Can apply to employees of specific departments . For instance, if there are employees from 2 different product lines, each of them may have different revenue and profitability targets.	Individual targets These are largely based on individual achievements and would constitute 0 – 20% for senior level employees to 40 – 80% for junior employees. Some individual targets may include: Individual Sales Performance, Production Performance (such as number of pieces manufactured), Project renewals, Number of hires (for recruitment department), Training imparted (for training department) and so on.
Evaluation and Recognition While appraisal and goal sheet achievement could be counted as individual targets, typically these are measured at a team level and we may see score adjustments based on normalization, relative ranking etc.. Hence these are under a separate category of Evaluation and Recognition. Some of the targets in this category are Appraisal score, Goal sheet achievement score, Client Recognition(s), Nominations for rewards, External events conducted etc.	Time based Most companies want their employees to start work on time, take minimum leave, be regular in attendance and manage their time effectively. This can be encouraged by adding the following parameters to their Incentive plans: Billable hours, On-time entry, Average weekly hours worked, Training hours undertaken etc.
Negative indicators To help avoid negative behavior, some companies include targets which have a negative impact on the variable incentives. Some of these could include: Leave without pay, Late entry, Non-completion of assigned targets, Disciplinary incidents etc.

Key challenges in implementing the Variable Incentive Plan

There are multiple challenges that organizations typically face in implementation of a Variable Incentive Plan and these are:

1. Communication of the plan to employees.
2. Collection of data which can help in calculation of achievements.
3. Calculation of Variable Incentives for a large population of employees.
4. Integration of the Variable Incentives Payout with the payroll software in a timely manner.
5. Communication of payout to employees in a transparent manner.

We have seen HR managers spend significant hours in managing the data collection, calculations and in communication processes. Because of the effort involved, most companies design plans with a minimum possible set of employees that are absolutely required for Variable Incentive Planning.

How EmpXtrack can help

EmpXtrack is an integrated HR software that combines all aspects of an employee’s lifecycle in an easy-to-use browser-based application. It integrates Goal Setting and Tracking, Appraisals, Training, Time, Leave and Attendance – in Employee Self Services, Recruitment, Rewards and Recognitions or other achievement related targets such as those explained above. All these can be automatically captured or imported in EmpXtrack and can be linked to Compensation Planning and Payroll Software.

EmpXtrack captures all these details and over 170 different parameters and helps companies manage the most complex Variable Incentive Plans. HR managers can in addition get reports on impact evaluation, scenario analysis and final payout – all in a matter of minutes.

To help design a Variable Incentives Plan for your employees or to enable an existing plan on a web-based software you may Contact Us with details of your requirements.