As we approach the last quarter of FY25, many companies are undertaking preliminary assessments of incentive outcomes and assessing whether the existing incentive frameworks are fit for purpose for the year ahead.  

To support companies to ensure that their incentive frameworks succeed in FY26, we share the four most common reasons why incentive plans fail and our suggestions to address them. 

Having an ad-hoc, or no incentive plan at all 

It may be that your company doesn’t have a structured incentive plan as part of its employee reward offering. Maybe your company relies on paying a salary, which may be increased from time to time, and perhaps a ‘Christmas bonus’ with a tenuous link to performance. 

In our experience, there are a few limitations with this approach: 

• Motivating employee discretionary effort – Motivating employees to go above and beyond their normal job duties can be difficult without a formal incentive plan in place. Without such a system, it may be challenging to communicate important goals, encourage desired behaviours, and reward exceptional efforts. An incentive plan paints a clear picture of what, “above and beyond” looks like in your organisation, so they can have a better chance of achieving it. 

• Managing an increasing salary budget  – When managing an expanding salary budget, companies may face challenges if they don’t have a variable pay component. This is because they will be limited to providing only fixed salary increases to recognise and reward employees. Depending solely on fixed salary increases can easily become unsustainable over time due to factors such as inflation and economic fluctuation. 

• Attracting and retaining the right people – Offering variable remuneration tied to exceptional performance that’s recognised through an incentive plan can be a great method of attracting and keeping the best employees. In today’s competitive job market, formal incentive plans are often a prerequisite for high-achieving candidates seeking a new career destination. 

Our Suggestion: Whether public or private, businesses should consider the design of a purposeful, well-structured and clear incentive plan that aligns the interests of employees to the interests of the business. The key is to develop a scheme that encourages and rewards ‘what’ is achieved and, equally important, ‘how’ employee behaviour aligns with the company’s desired culture. 

Performance measures that don’t stack up 

Incentive plans often rely on performance measures to drive employee productivity, but there is often a weak link between individual objectives and overall business success. This can lead to suboptimal workforce productivity and dysfunctional workplace culture (e.g., siloed workplace culture). Our experience shows that this misalignment can occur when companies adopt a “set and forget” approach to incentives where there is almost an “entitlement” philosophy by participants.  

To measure the effectiveness of performance measures and their alignment with organisational performance, The Reward Practice conducted an analysis of Chief Executive Officer’s (CEO) from the “TRP 150” representing a selection of companies of all sizes and sectors.  We did the same analysis for CEOs from the ASX300 Metals and Mining Index.   Specifically, we examined short-term incentive (STI) payouts and the returns to shareholders over the same year.  

As shown in Fig. 1, whilst some variance occurred in STI outcomes for the best and worst performers of CEOs of the TRP 150, a material misalignment is evident for CEOs in the ASX 300 Metals and Mining group. For the ASX 300 Metals and Mining group, STI payments were almost identical, with CEOs from companies with the poorest share price performance receiving STI outcomes marginally greater than the CEOs from the best performing companies.  

Fig. 1: Comparison of STI Outcomes and Company TSR Performance 

We acknowledge this analysis provides a reasonably simplistic assessment of pay alignment with performance (e.g., 1-year TSR is a lag indicator and not necessarily representative of long-term business success).  Nevertheless, the analysis does raise the question of whether appropriate performance measures have been adopted which are in the interests of the business and its shareholders. 

Our Suggestion:  To ensure that incentive payouts align with company value creation, it’s important for companies to take a comprehensive approach that considers both organisational and employee performance. This involves designing incentive schemes and defining performance metrics with careful consideration and scenario testing to identify potential payout anomalies. 

Payout timing not consistent with performance outcome 

For many companies, an annual performance assessment and incentive payment is the standard approach for rewarding employees. However, this “one size fits all” approach may not effectively reinforce performance and reward messages to employees at different levels of the organisation. For instance, a production worker’s efforts may result in tangible outcomes on a monthly or quarterly basis, whereas it may take a year or more for an executive to see the results of their work. 

This misalignment between performance outcomes and payment timing can also lead to overpayment or underpayment, potentially resulting in an inconsistent payment that doesn’t accurately reflect an employee’s performance. This is why some ASX companies adopt deferral on STI payments, allowing more time to verify outcomes and mitigate risks associated with premature rewards. 

Our Suggestion: For an incentive scheme to be effective, it should recognise and reward employees as closely as possible to the realisation of the desired outcome. Companies should consider basing incentives on their business operating cycles, rather than relying solely on predefined performance periods of one or three years. Additionally, it may be helpful to design incentives for different workforce segments (such as staff, management, and executives) to identify key performance horizons and align reward timing accordingly. 

The purpose of the incentive is not clear 

Incentive plans can be well-designed, fair, competitive, and aligned with business drivers, but their effectiveness hinges on whether all stakeholders understand and embrace their purpose. The purpose of incentive programs can vary depending on the organisation’s desired outcomes and behaviours. 

For example, a start-up focused on commercialising a product or service may use an incentive plan to incentivise achieving a key milestone by offering shares in the business. However, in many cases, the purpose of incentive plans is not clear, resulting in participants making their own determination of entitlement, regardless of performance. It is essential to clarify the purpose of the incentive plan and manage employee expectations to align the payout with the company’s growth and individual performance. 

Our Suggestion:  An effective incentive plan must have a clear purpose that communicates to employees the connection between business objectives and personal outcomes. For instance, if the company increases profitability, it can lead to an incentive payment, and this purpose must be clearly communicated to the employees. 

Incentive plans that encourage employees discretionary efforts towards key business imperatives can be highly beneficial for all stakeholders. We specialise in designing effective, ‘fit for purpose’ remuneration strategies for organisations and then help you implement them across your business. 

Find out how your business can benefit from a new or revised incentive plan today.  Contact us