How effective is your incentive pay scheme?

Imogan Angermund – To understand an incentive pay scheme, we need to understand what performance management is, as they are interlinked.

Performance management can be defined as a process which continuously identifies, measures and develops the performance of your workforce. And to do so, each individual’s performance and objectives are connected with the overall mission and goals of the company.

An incentive scheme promotes performance management through awarding additional incentives (monetary/non-monetary) to employees as a reward for meeting performance objectives – basically the carrot at the end of the stick.

Incentive schemes are powerful tools to ensure alignment of employee behaviour to business strategy – serving as a key business and human resources improvement tool for attraction, retention and workforce engagement.

A well designed performance management system (PMS) and incentive scheme can become an untapped source of competitive advantage by using pay to reinforce behaviour that best serve the company’s business strategy. Hence, it is of utmost importance that the design of the PMS and the incentive scheme is aligned to the overall business strategy and objectives of the organisation.

Possibilities

There are endless possibilities with the design of the system and/or schemes.

The key is to understand the organisation’s business objectives (i.e. organisational goals to be achieved) and then align the performance measures to achieve the said business objectives – whether the organisation wishes to drive operational excellence, product/service leadership or customer intimacy.

Performance management and incentive schemes should be designed to motivate employees and increase employee engagement – to focus employees’ attention on the business strategy through aligning individual goals with business goals.

Testing effectiveness

? Is the system creating the employee behaviour desired to achieve the overall business objectives?

? Are you paying performance bonuses/incentives? If not, it may be an indication that either the performance management system or the incentive scheme is not effective.

? Are your employees motivated by, or demotivated by the current system and/or scheme? If the majority or average of employees are not meeting performance targets, it may indicate that the system and/or scheme is not effective.

? On the opposite end of the spectrum, are you paying excessive incentives and are the majority of employees exceeding targets, although this performance is not reflected in business growth or increased profitability? The current system or scheme may require a revisit.

In conclusion, all organisations wish to improve market share and profitability. Contact our team if you wish to review or improve your performance management system, policies and/or incentive pay scheme.

Imogan Angermund is the manager: people and organisation at PwC Namibia. Contact her at imogan.waterboer@pwc.com