Strategic Compensation: Designing Effective Employee Incentives

Understanding Incentive Types & HR Strategy

This document explains various types of incentives: individual, group, and organizational incentives, and their integration with HR strategy. It also touches upon specific elements of a compensation package.

Individual Incentives Defined

Individual incentives are rewards based on the personal performance of employees. They are directly linked to individual performance behaviors and outcomes.

Group Incentives Defined

Group incentives are rewards based on the collective performance of teams or an entire organization.

Common Approaches to Base Pay

Two basic methods are commonly used to determine base pay:

• Point Systems

  Each job is evaluated within a range of points, and base pay is set at a higher level for jobs with more points.

• Skill Sets

  Skill sets are defined by the number of tasks an employee is capable of performing. Employees who can perform more tasks are paid a higher base wage.

Aligning Incentives with HR Strategy

Creating effective compensation packages requires aligning the mix of individual, group, and organizational incentives with the overall HR strategy.

Specific Individual Incentive Programs

• Piece-Rate Incentive

  Employees are paid a fixed amount for each piece of output they produce.

• Commissions

  A special form of piece-rate compensation, most often associated with sales. For each sale obtained, a commission (a percentage of the total amount received) is paid to the salesperson.

• Merit Pay Increase

  An increase in base salary or hourly rate directly linked to performance.

• Merit Bonus

  A sum of money given to an employee in addition to normal wages, typically on a fixed schedule (e.g., at the end of the year).

• Unplanned Bonuses

  Sometimes bonuses are unplanned and given when high performance is observed.

Group and Organizational Incentive Programs

• Goal-Based Team Reward

  Provides a payment when a team reaches a specific goal.

• Discretionary Team Bonus

  Provides payment when high performance is observed, without a pre-set goal for a specific outcome.

• Team Award Distribution

  Team awards are usually distributed in one of two ways:

  • Divided equally among the team members.
  • Higher-performing members receive a greater reward.

Advanced Group & Organizational Incentive Techniques

• Gainsharing

  Occurs when groups of workers receive a portion of the financial return from reducing costs and improving productivity.

• Profit Sharing

  Occurs when employees receive incentive payments based on overall organizational profits.

• Stock Plans

  Transfer corporate stock to individual employees. Two popular programs are:

  • Stock Options: Represent the right to buy company stock at a given price on a future date, potentially tied to performance or pay grade.
  • Employee Stock Ownership Plans (ESOPs): The organization contributes stock shares to a tax-exempt trust that holds and manages the stock for employees.