Keeping Top Talent Happy and Productive: Part 2

If you read my post last week, you know that a foundation of externally competitive and internally equitable pay is the cornerstone of a total rewards package that will keep your top talent happy and productive. Now that you have a solid foundation (thanks to your compensation structure), you're ready to move on to the next component - variable incentives. Here's a list of five questions to get you thinking about variable incentive pay.

1. Do I have to pay variable incentives? No - in fact, approximately 40% of the respondents in a recent Payscale survey don't pay variable incentives. It depends largely on your industry. Among non-profits, only one-third of companies pay variable incentives. But the majority of companies in other industries do offer some kind of variable incentive pay.

2. How much should I be spending on variable incentive pay? There's no easy answer to this one. According to Payscale, on average, companies spent about 6% of their total payroll budget for 2010 on incentives. But there's a huge range - anywhere from 0% to 100%. 

3. Who should get variable incentive pay? Typically, executives, directors and managers get incentive pay. This group accounts for 84% of the employees who received variable incentive pay in 2010. But there's no reason to limit yourself - your only constraint is your creativity (and your budget!). Use variable incentives where they will achieve the most.

4. Should I use discretionary or non-discretionary incentives? The field is pretty evenly split on this one. About one third of respondents used discretionary only, another third used non-discretionary only, and the remaining third used both.Some argue that non-discretionary incentives are better motivators since they are granted only after specific goals or objectives are met.

5. What kind(s) of incentive pay should I use? The most common type in 2010 was an individual incentive bonus. This represents a change from 2009, when spot bonuses were the most common. Individual incentive bonuses are particularly popular with mid-sized companies - three out of every five included them in their incentive pay packages.

Here's the breakdown of who's paying variable incentives and what kinds of incentives they're using:

Variable incentives can be a useful component of an overall rewards package that will keep your top talent happy and productive. But the key to a successful variable incentive program is defining expectations in realistic and measurable ways. Goals should be attainable, profitable, and practical for both the employee and the organization. If not, disaster can ensue. Consider the case of the building design company who implemented an incentive pay plan to encourage its engineers to draft buildings under budget. One engineer earned a large incentive payment by scaling down the building's walls and ceillings by 6 inches. While he met the goal of coming in under budget, he didn't produce a very good building...

Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. For more than a decade, she's been working with businesses and government agencies providing expert EEO analysis. Stephanie has published several articles on examining compensation systems with respect to internal equity, and has appeared on NPR to discuss the gender wage gap. She is the host of The Proactive Employer, and is the founder of Thomas Econometrics. Follow her on Twitter at ProactiveStats.

Comments

[Dan Walter]

GREAT post.

[Stephanie R. Thomas]

Thanks Dan! Glad you enjoyed it!

[Laura Schroeder]

We can always count on you for the great stats AND clear interpretation.