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Trends in Short-term Incentive Plans

Lately I have been receiving more and more requests around short-term incentive plans (thank you!), so I thought I would take a moment to talk about trends I am seeing recently. Short-term incentive plans are becoming prevalent across all industries, sectors and organization sizes. With salary increase budgets ranging 2-4%, organizations are looking for other ways to reward employees and maintain competitiveness with the market. Short-term incentive plans provide those additional rewards to employees and also provide increased performance and productivity in return to the organization. 

There are many ways to structure a short-term incentive plan; the most effective plans support the organization’s compensation philosophy, business strategy/goals, and organizational culture and values. 

Many organizations are structuring their plans to include organizational performance measures and individual performance. Organizational measures align employees with the goals of the business and help drive them to success while individual performance measures allow the organization to differentiate rewards for individual performance. Individual performance is determined by achievement of one’s individual, pre-set annual performance goals, and are included within an incentive plan as a multiplier applied to organizational performance or a separately-weighted component of target incentives. 

Individual discretionary awards are almost a thing of the past – especially in this day of pay equity and compliance. Although some may argue any type of individual performance has some discretion, pre-set annual goals are documented and provide an audit trail. Additionally, many organizations are moving away from traditional profit-sharing plans (sharing the organization’s profit across the employee population) to implement incentive plans that include some type of individual performance factor.

Generally, target incentives will be set as a percent of base salary. The appropriate target percentage considers many factors to include market data, internal structures, compensation philosophy, and others. Highly effective plans include a minimum level of performance achievement to receive a portion of target incentive, target performance to receive target incentives and an overachievement to receive higher-than-target incentives. Short-term incentive plans are based on a performance period of no more than 1 year and are generally paid annually (or after the end of the performance period if the period is less than 1 year).

Implementing a formal incentive plan is a way to drive consistent behaviors, aid in compliance, and reward employees for the success of the business. Incentive plans are unique to each and every company. We at Atlas Compensation Partners look forward to working with you to design the right program for your organization!

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