Examining the Criteria of an Effective Incentive Plan

In 1929 fringe benefits, made up 1.7 % of payrolls. Today, they account for over a third of total payrolls. The increased composition of this form of compensation as part of an employees total rewards package is partly due to the result of reduced taxes that employees are obligated to pay as well as the variability and therefore relative uncertainty regarding the costs associated with some benefits, were they not guaranteed by the employer. In addition to base salary and benefits that include adequate sick-leave allotments, paid vacations, mental health days, retirement pensions, and health insurance coverage, etc., companies also motivate employees through incentive plans.

In order for an incentive plan to be effective, the particular short and long-term needs of the employee need to be met. The comparable benefits package is determined after establishing the type of base pay structure set for salaried and commission positions, for example, skill-based, knowledge-based, competency-based (abilities), or direct market pricing. Instead of a pre-chosen set of benefits potential employees may wish to negotiate cafeteria-style fringe benefits. To some employees choice is critical as they may require child care services, while others who are older and do not have dependents may seek a larger pension that includes an IRA or 401K, in order to be able to plan for retirement. Others may be at risk for medical conditions requiring expensive treatments and therefore would like the peace of mind and security of a PPO health plan that allows patients to choose a doctor and hospital facility, lower deductible payments, and obtain comprehensive coverage for costly medication, treatments, and surgical procedures.

Based on the principles of a free-market capitalist system, the dollar amount of incentives is primarily determined by the perceived or real value that an employee brings to the firm. Depending on the hierarchal level of an individual, their seniority, skills, past productivity and the like, the components of packages and compensation widely vary. An example of the difference in incentive amounts in publicly traded corporations between top management and those in middle management, supervisory management, and the front-line is the awarding of lucrative stock options. However, broad-based stock option plans (can be cashed out at anytime) and employee stock ownership plans (have tax advantages and promote long-term performance) are now becoming more common below executive pay grades. Granting shares of a company to employees has been proven by numerous studies to increase performance among the ranks. Similarly, performance bonuses such as lump-sum payments and merit-pay increases have also proven to raise productivity. In addition to ownership, bonuses, and merit pay, profit sharing and deferred profit sharing are tools management utilizes to enhance employee motivation.

An example of an effective incentive plan for car salesmen at a brand name dealership include a mixed salary/commission plan with performance based lump sum payments determined by the number of vehicles sold within a given time period. Salesmen would be afforded paid vacation days, perks such as free car washes, health insurance coverage that includes family members, and employee stock ownership plans, as part of a mixed level plan that promotes mutual cooperation and teamwork while selling to customers and providing service. This combination of near-term and long-term incentives would help balance the immediate need to move units off the lot while meeting customers’ expectations of continuous quality service from all staff members.

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