How Much Incentive Compensation?
The magic of 15%.
By Rob Marchalonis.
The way up, may be to pay up. If you are looking for a way to boost employee engagement, effort, and results, then consider incentives. No other resource is more valuable to you than your team, especially when you bring out the best they can offer. Smart incentive plans that “share your organization’s success” can give you a mechanism to reward and motivate your team toward more positive outcomes.
How much is enough? One question that leaders often ask about financial incentives is, “How much is appropriate?” I have two favorite answers to this question:
The first is, “As much as possible.” I say this truthfully (with a smile) and one very important caveat. The key is that any amount you share as an incentive should be somehow proportional to the organization’s results and ensure that the organization itself retains a benefit. So, a more complete answer would be, “As much as possible, so that both employees and the organization optimize their outcomes and benefit.” The idea is to avoid any situation where employees benefit to the detriment of the company.
My second answer to the question is, “An amount that will equal 15% or more of an individual’s total compensation within a reasonable measure of time and performance improvement.”
The magic of 15%. I have more practical than scientific evidence of 15% as a special number, but have always considered it to be a magical improvement threshold. Improvements of 15% or more are almost always significant and visible, and the ability to improve virtually anything by this magnitude is usually exciting and inspiring! In contrast, improvements of less than 15% are all-too-often uninspiring and under-motivating. Would you agree, particularly when considering compensation, that the potential for 15% or greater improvement is motivational?
Whatever improvement goals and incentives you set, remember that they will also be considered along with the risk (or likelihood of success) and expected effort that will be required to accomplish them. Who would be motivated to increase their income by 5% if it involved engaging in a high-risk endeavor that would likely demand 25% more effort? Not many.
Let’s look at some numbers. Consider how the addition of various incentive percentages would affect the total annual compensation of an employee who currently earns a base pay of $52,000 per year:
Incentive Impact on Earnings
The numbers above reveal that an employee with gross earnings of $52,000 per year would gain an extra $150 per week, $650 per month, or $7,800 annually from incremental incentive earnings of 15%. For most, these extra earnings could have a very positive “quality of life” impact, allowing for a nice family vacation, a down payment on a new car, significant home repairs, college savings, retirement funding, and more. What additional employee motivation might you develop by offering the potential for incremental incentive earnings of 15% or more?
Regardless of the incentive percentage earned, also consider your payout options. What paycheck amount and frequency of payment (weekly, monthly, quarterly, or annually) would make incentives most relevant to your employees? Incentive payouts that are frequent but small (like weekly) could be underappreciated and logistically challenging. Payouts that are large but infrequent (like annually) may be insufficient to drive weekly motivation. For many, a monthly or quarterly payout is optimum. And although it requires a little more work, incentives paid by separate check often have the most impact.
Win-win. Incentives are not a free lunch, and everyone should clearly understand that they must be earned. The secret is to design variable compensation plans that take the dynamics of the business into account and result in payout formulas that reward both the employees and the organization. For obvious reasons, the formula must consider the business first and allow for sustained business operations and investment, which in-turn will help ensure the ongoing distribution of incentives.
To succeed bigger, consider paying better. Explore ways to engage and motivate your employees by sharing your success with incentives. Allow for adequate payouts, ideally that reach or exceed 15% of an employee’s annual compensation in return for proportional improvements to your enterprise. By developing smart incentives that ensure win-win outcomes for all stakeholders, you can achieve better payouts for your team and bigger success for your organization.
Rob Marchalonis is the founder of IncentShare and author of IncentShare: Motivate, Recruit, and Get Results with Incentives, now available at Amazon. Connect with him at www.IncentShare.com