Jun 6 2023

The Power of Incentives: How Bonus and Incentive Plans Propel Companies to Success While Controlling Payroll Costs

How to Develop Bonus and Incentives Plans that Get Results

A common denominator in companies that excel is comprehensive and impactful incentive and bonus plans that drive the organization’s growth and achievement of critical goals. A well-designed program can motivate employees, improve performance, and fuel organizational growth. In addition to their impact on success, bonus and incentive plan also serves as a great way to control payroll costs. In this article, we will delve into the top five reasons why US companies with bonus and incentive plans are far more likely to succeed than those without while effectively managing their payroll costs.

Performance-Based Compensation

Bonus and incentive plans provide a performance-based compensation structure that links rewards directly to individual or team achievements. This approach allows companies to reward high performers while ensuring that compensation aligns with the value created. By incorporating performance metrics and targets into incentive plans, organizations can control payroll costs by rewarding top performers who contribute significantly to the company’s success.

Cost-Effective Retention Strategy

Employee turnover can be a significant drain on an organization’s financial resources. According to a 2022 study by Keep Financial, 86% of employees would stay at the company for a period of time in exchange for a cash bonus. Bonus and incentive plans offer a cost-effective retention strategy by providing rewards and recognition to high-performing employees. By motivating and engaging employees through these programs, companies can reduce turnover rates and the associated costs of recruitment, training, and lost productivity.

Variable Compensation Structure

Unlike fixed salaries or traditional pay scales, bonus and incentive plans introduce a variable compensation structure that allows for flexibility in payroll costs. These plans can be designed to align with the company’s financial performance, ensuring that compensation expenses are directly tied to business results. During periods of economic downturn or financial constraints, companies can adjust the bonus and incentive payouts to control payroll costs without sacrificing employees’ overall motivation and performance. To best measure and calibrate a plan, companies should consider four key plan design principles:

1. Ensure accurate measurement

Align payout curves with organizational expectations and ensure that incentives for performance are aligned with accurate measures of financial results. Objectives, in addition to financial goals, can be qualitative in nature. For example, building customer loyalty, raising quality objectives, or elevating employee morale, can be key organizational goals.

2. Balance short-term and long-term incentives

Determine the proper mix of short-term and long-term incentives. Short-term incentives are usually aligned to annual revenue or profit objectives; long-term incentives, on the other hand, are generally linked to added shareholder value over a longer period of time.

3. Promote compliance

Plans must be designed to maximize tax benefits for the company (and its employees) and do not violate any IRS rules. This applies not only to public companies but also to private companies. Investors and/or company owners are demanding greater accountability on incentive plans and how they are aligned to value creation.

4. Keep the plan workable

Simplifying compensation plans is crucial to ensure their effectiveness, as overly complex plans can be incomprehensible for participants. The key is to maintain simplicity in goal setting, award calculation, and the number of metrics involved. Ideally, limiting the metrics driving awards to three to five is advisable.

From: The Controller’s Report (Issue 13-7)

Cost Containment through Goal Setting

Bonus and incentive plans enable companies to define specific goals and targets that align with the organization’s strategic objectives. By setting ambitious yet attainable goals, companies can channel employees’ efforts toward driving performance and achieving desired outcomes. This goal-oriented approach helps control payroll costs by allocating incentives to individuals or teams who meet or exceed predetermined benchmarks. It allows companies to focus on rewarding exceptional performance rather than providing across-the-board salary increases.

Return on Investment (ROI)

Bonus and incentive plans can be seen as an investment in driving employee performance and organizational success. When properly designed and implemented, these programs yield a positive return on investment. A study published in the Journal of Labor Economics found that incentive pay significantly increased productivity, with the average return on investment ranging from 30% to 50%. By strategically allocating resources to reward high performers, companies can control payroll costs while reaping the financial benefits of improved productivity and business outcomes.

Calibrate Budget and Payouts

When setting bonus levels, consider the 80/20 ratio: Set your payout at a level where only 20 employees reach no more than 80% of the payout. If more than 20% of employees get more than 80% of the projected payout, your goal is too low. Ideally, the rule is that the bonus budget should payout only 60% of the targetted goal.

Set Realistic Bonus Levels

In deciding the amount of a bonus, one should consider budgets, payout, number of employees in the plan, objectives, ROI, and the total cost at the end of the plan year. Additionally, the payout must be attractive enough to be meaningful to employees. Although there are a variety of plan models, the typical bonus amounts, expressed as a base of regular pay, are as follows:

Conclusion: In addition to their impact on motivating employees and driving organizational success, bonus, and incentive plans offer companies an effective way to control payroll costs. These programs provide a performance-based compensation structure, act as a cost-effective retention strategy, introduce variable compensation, allow for cost containment through goal setting, and offer a positive return on investment. By leveraging the power of incentives, companies can strike a balance between rewarding exceptional performance and managing payroll costs, ultimately propelling their success in the competitive business landscape.

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Jun 6 2023

How to Boost Your 2023 Plan with Power-Packed Compensation Strategies

Powerful Compensation Strategies for 2023

Is 2023 the Year to Upgrade Your Compensation Strategies? Absolutely.

As 2023 progresses, employers are experiencing recruiting fatigue and facing low employee engagement scores. Adding to the pressure are employee preference for flexible work arrangements and management reviewing their policies to entice employees to return to the office. In addition, new pay transparency requirements in various states, including NY, CA, and Washington, have promoted employers to update their recruiting policies with greater urgency for up-to-date salary information so they can make informed offers to prospective candidates. To help organizations meet these challenges, Blue Whale Compensation has compiled a series of compensation strategies that can help companies best manage their labor and talent needs.

We are living through a historical shift in the workplace with rising wages and inflation. At no other time in recent history has compensation taken a front seat as a means companies can use to retain, engage, and attract new talent. A compensation strategy, however, should not be confused with solely giving employees aggressive increases. Unwarranted increases with no other plan are likely to make issues worse.

The plan needs to be based on a comprehensive analysis of budgets, labor needs, current and future talent needs, and basic compensation planning.

A Market Analysis is a Must

Carefully examine market levels and set appropriate salary benchmarks. Based on that information, consider market adjustments. Market adjustments should aligned to market trends, inflation, employee performance, market position, and budget. With inflation eating away any substantial wage gains, forecasting reports indicate that most employers will grant increases above those in 2022. In 2023, pay increases ranged from 4.5% to 5.7%. Furthermore, a preliminary analysis of Blue Whale clients’ plans suggests that a majority of them are inclined to offer a one-time bonus to address the substantial inflation witnessed over the past 18 months.

Merit-Base and Market-Driven Increases based on Performance

Combine your performance management information with an employee’s market position if you have ranges and midpoints. Using a merit-driven grid, you can justify larger, above-average increases to high-performing, underpaid employees. Conversely, the matrix helps you develop a policy to slow down salaries that are way above market midpoints.

Download Matrix

Is setting merit based on employee performance and market position tricky? Blue Whale can help. We provide BlueComp, a freeware app that helps organizations manage their compensation program, including merit-based pay. For more information, click here to view how BlueComp can help you manage your compensation program.

Identify Employees at Risk

Mine your employee data and identify the employee population that is most at risk of leaving your company. Use your compa-ratios! Employees with the lowest compa-ratios are twice as likely to be looking for employment. Review your employee population via existing interview data: what departments, units, or types of employees are leaving at a faster pace, and what trends can you derive from their exit interviews?

Closely examine your labor stats and compare them to specific benchmarks. For example, voluntary turnover rates are between 10% and 17%. Are your higher or lower? Employee tenure is another key barometer to measure at-risk groups. Employees who have more than four years with a company as twice as likely to stay with the company for another three to four years. Employees who have less than two years of experience are twice as likely to be looking for another job. In addition to critical stats, check data from your employee opinion or engagement surveys. They often contain valuable information that can help you identify at-risk employee populations.

Implement a Basic Compensation Plan with Guidelines, Grades, and Ranges

Unlike the rapid wage movement that employers experienced in 2022, pay increases in 2023 have slowed down. Your plan must be appropriately aligned with current market conditions. The plan must include grades based on job leveling; ranges reflecting reasonable hiring salaries; policies addressing promotions and demotions; and, most importantly, a basic outline of your company’s compensation philosophy.

View Sample Comp Philosophy

Upgrade Your Performance Management System

Over the last few years, AI-driven solutions have come into the marketplace with innovative technologies that have simplified the often complex and disliked world of performance management tools. Many tools exist to offset companies’ great challenges with their existing program. Most app-based solutions tend to be affordable, flexible, and easy to deploy.

Consider Bonus for High Paid Employees, Not Increases

For high-paying employees versus additional salary, examine the market, and follow the following strategic budget: For employees over the midpoint, offer them a one-time bonus; for employees under the midpoint, add to their base. Over time, this strategy will keep your costs even with the market, and you can target at-risk employees and perhaps even keep them.

Selling your Plan

The biggest mistake companies make when resetting a compensation program is focusing their message on how the new plan will make the company more productive, efficient, and ahead of the curb. Instead, The message should focus on giving the employees the information they need to trust the process and the overall plan. This effort requires a significant public relations strategy that cultivates the organization’s needs for the immediate future and long-term success.

Let’s Start the Conversation

Blue Whale offers a full range of compensation services to help you achieve your business goals. Whether you’re looking to design a new compensation plan, analyze your current program, or stay up-to-date with the latest trends, we have the expertise and resources to meet your needs. Contact us to learn more about our compensation services and how we can help you take your program to the next level. Let’s start the conversation!