Rules for designing incentive compensation systems

Question

What are the rules for designing incentive compensation systems?

Answer 1

Rule for designing incentive compensation systems:

The ideas and company experiences discussed yield the following perspective rule for creating an incentive compensation system to help drive winning strategy execution:

i. The performance payoff must be a main not small part of the total compensation package.

ii. The incentive plan should extend to all managers and employees, not just top management.

iii. The reward system must be administered with conscientious fairness and care.

iv. The incentives should be based only on achieving performance goals spelled out in the strategic plan.

v. The performance goals each individual is expected to achieve should engage results that the individual can personally affect.

vi. Keep the time between performance review and payment of the reward short.

vii. Make liberal use of nonmonetary rewards – do not rely exclusively on monetary rewards.

viii. Absolutely avoid skirting the system to find methods to reward effort rather than outcomes.

Once the incentives are designed, they have to be described and communicated.