Incentive Plan Secrets To Combat The Great Resignation

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Incentive Plan Secrets To Combat The Great Resignation

by admin

by admin

It’s time we shone a light on incentive plans. Firstly, because it’s the time of year when companies should be conducting incentive-related performance checks. (Download our free interactive remuneration calendar) Secondly, because incentive plans are something we are asked about a lot.

With the threat of ‘The Great Resignation‘ driving wage inflation, we are receiving more and more enquiries from clients wanting to know “by how much” they need to increase salaries and bonuses to stay competitive.

What they don’t realise is, that’s entirely the wrong question to be asking.

Don’t Ask What To Pay, Ask How To Pay

We have a lot of remuneration data and we do a lot of remuneration quantum benchmarking for clients. However, when a company is facing the challenge of how to design its incentive plans with the goal of minimising attrition and increasing employee engagement, that’s not the toolset we reach for. Dangling a larger carrot may be a short term solution, but once the ceiling is hit, the leverage disappears.

 The important question to be asked and the problem to be solved is, “How can we incentivise our team so that both the employees and the company win?”

We see many incentive plans that have been developed in contradiction to that objective. Traditional incentive plans tend to reward certain behaviours (i.e., when a person completes tasks XYZ, they receive a bonus) rather than outcomes (e.g., when a company has exceeded its forecasted earnings). A ‘box-ticking’ system of reward such as this can leave business leaders scratching their heads when they find themselves paying out large employee bonuses at the end of the year, even if the business itself has produced average or even below-average results.

These types of incentive plans can create an environment where the employee naturally becomes granularly focused on performance metrics that will result in their reward. Consequently, they lose focus on the bigger organisational picture. That’s not the mindset companies need employees to have.

Rethink incentive plans, embrace shared value

So what is the better approach? The answer is found through creating an environment of shared value.

A reward system based on shared value results from the implementation of remuneration practices that contribute to competitive advantage while providing benefit to both employees and the business.

In such a reward system, employees are viewed as ‘business builders’ rather than individuals who simply fill roles. When employees are rewarded based on the success of the business – in the same way the business owner is – it creates the ideal mindset for long-term wealth generation all around.

Incentive plans designed on this concept spark inspiration, purpose, visionary thinking and motivation. Sounds awesome, right? Intuitive even. And the really great news is that those are the same key employee mindset shifts that help to ward off the effects of the ‘Great Resignation’.

However, according to data from our latest Remuneration Pulse Survey conducted in November 2021, only 8% of Australian companies surveyed had created a profit-sharing (value sharing) mechanism for their employees. See Fig 1 below.

Fig. 1 STI approaches for non-Executive employees – percentage of respondents

incentive plan secrets chart

So how can companies put this concept of value sharing into play and safeguard against mass waves of resignations? In a previous article we shared 4 Common Problems We See With Incentive Plans which included 5 key elements required to rework traditional incentive plans into effective value sharing plans.

The 5 elements to an effective value sharing plan

Determine what value means for the company

An organisation must first identify its unique indicators of value to incentivise. For most, that will be things like profit results, revenue growth, cultural change, etc., though it will look different for each organisation. The important point here is to identify the core value driver that the incentive program can then be designed around. Then, set a specific value threshold and decide that anything beyond that is determined to have been generated by employees – or rather, ‘business builders’.

Decide how much value the company wants to share

Once the value driver has been defined, the company must decide how much of it to share and with whom. What is the right target that is achievable, but has some probability of not being met? (hint: if the business is paying out incentives every year it is likely the target is too low and incentives will be seen as an entitlement. As a rule of thumb, in five years target should be met approx. 3 times).

Will participants be executives and upper management alone or will all levels of the organisation be involved in the program? Decide on what form the reward should take. It may be a cash payment or an award of shares, for example. Then develop a policy to govern decisions around how much value should be allotted to short-term and long-term success. And don’t forget shared value must also factor in shareholder return expectations i.e., will the amount of profit allocated to the employee incentive pool leave enough in the pot to provide a reasonable return to shareholders?

Decide the timeframe – short term or long term?

Businesses can only be successful if short term (annual) wins also contribute towards future growth. Owners understand this. The trick is getting employees to embrace this as well. This is not a new concept – traditional incentive plans also include rewards for short and long term performance – it’s just that the metrics are different in this case and whether or not they’re awarded depend upon the value created. So remember to address multiple performance periods when developing a value sharing plan. Reward short term achievements but also ensure there’s a prize at the end for those business builders who have long-term vision and drive. This also help to create a defence mechanism against the effects of the Great Resignation.

Determine other measures to focus on

The effectiveness of the value sharing model rests upon the idea that first and foremost, the base metric is met. That is, the company has reached and exceeded its profit/revenue/expansion threshold and it’s now into the ‘gravy’. Whatever off-shoot value sharing success measures branch from the base metric are up to the organisation. They can be financial as well, by way of different profit tiers to be reached, or they can be non-financial, perhaps more aligned with the social or environmental impact of the organisation.

Communicate, communicate and communicate again

The last element to address when shifting from old-school incentive plans to value sharing is communicating the change. It’s critical that business builders understand what’s in it for them by hearing company leaders speak about, “What’s in it for us.” The company is proposing not an offer of employment, but being part of building a business. The success of the plan depends upon how well that message is marketed to the participants. Make it clear that they are viewed as key contributors to the direction and growth of the company for the long term. Recruitment discussions then shift from, “This is a position we would like you to fill. It’s worth $100,000 per year,” to “Here is an opportunity for you to be part of building our business and earn up to $1 million in the next 5 years.”

So perhaps instead of thinking about how much to pay to stay competitive and incentivise employees, consider how to turn them into long-term business builders and champions for the company cause. Contact us for help getting started.

The Reward Practice is an independent, boutique consultancy service specialising in remuneration, reward and incentive program design.

Contact us for a no-obligation discussion today.

 

Related Posts about Incentive Plans

4 Common Problems We See With Incentive Plans

Incentive Measures For Each Stage Of Business

5 Steps To A Killer Remuneration Strategy In 2022

 

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