Types of Incentive Pay Plans
Incentive pay plans are part of compensation packages that reward high-productivity employees with various rewards. Not only are incentives excellent motivators for employees, but they are also increasingly becoming necessary if companies wish to attain and retain top talent.
In the past, a simple monetary bonus for meeting specific objectives was enough for employees, but as time has progressed, the demand for more diverse incentives has increased.
There are six main types of incentive pay plans: One-time bonuses, profit-sharing, shares of stock, retention, non-financial recognition and career development.
One-time bonuses are used to reward individuals for achieving distinct milestones or providing a valuable service. The most prominent example is the yearly bonuses many companies give to their employees for achieving preset goals.
For a lot of employees – especially those in manager and executive positions – much of their annual compensation is tied into a yearly bonus, which can either be a predetermined amount or a percentage of their annual salary. Knowing that yearly bonuses represent a huge chunk of their earnings encourages people to strive to achieve goals set by the company.
Other one-time bonuses may include referral bonuses for employees who refer talent to the company, as well as introducing cost-reducing plans. Companies are not likely to flourish long-term without top talent, and encouraging employees to refer people within their networks makes this process much easier for businesses. Paying employee's a referral bonus for a qualified candidate can also lead to a reduction in recruitment costs.
A profit-sharing plan is one where employees get a share of the company's annual profits. This plan will usually have a predetermined formula for deciding how much to allocate and distribute among the employees. Most profit-sharing plan payouts happen yearly, and employees get paid in either cash or stocks. Profit-sharing plans are designed to assist employees with saving and investing for retirement.
To help with retention, companies may offer stocks with criteria that incentivize employees to remain with the company. The most common example is when companies offer restricted stocks to employees. Restricted stocks are shares that employees own, but cannot utilize until after they have been with the company for a specified period.
Company executives are usually eligible to receive performance-based stocks as a reward for good company performances over multi-year periods.
Retention bonuses award employees for remaining with a company during critical times and business cycles.
Common examples of these bonuses include those awarded after companies have merged or after another company has acquired them. The bonuses may be paid out over time or in full at a specified time. They are useful for companies looking to keep employees that have received offers from other companies.
Hiring and training new employees is expensive for companies so they would much rather keep their current employees than start over with someone new.
Money is always appreciated, but many people also thrive off recognition for their hard work and achievements.
The "Employee of the Month" programs set in place by many companies is one example of a non-financial incentive offered to employees. Along with recognition among their colleagues, many recipients of this award receive special perks at work during their chosen month.
Many people dislike feeling stagnant in their careers and personal development. Giving employees the chance to receive training and development outside of their day-to-day job is an incentive many companies are beginning to offer.
Some companies may choose to offer it company-wide, while some may opt to use it to reward top performers.