An overwhelming percentage of organizations rely on incentive-based pay practices to compete for top talent and to motivate employees. And, especially when it comes to short-term cash incentives, employers are offering a broader array of bonus rewards, confirms a new survey conducted by WorldatWork, an association of total rewards professionals, in conjunction with Deloitte Consulting and Vivient Consulting.
"Incentive programs are alive and well at companies from all different sectors," Kerry Chou, WorldatWork senior practice leader on compensation, e-mailed SHRM Online. "The data shows no indication of companies pulling back or reducing the use of these types of programs."
Taken in October 2013, the survey received responses from more than 350 publicly traded companies, 190 mostly large private, for-profit companies, and 175 nonprofit and government organizations.
Organizations Offering Employee Incentive Plans
Annual incentive plans
Discretionary bonus plans
Long-term incentive plans
Source: WorldatWork, Deloitte Consulting and Vivient Consulting
Examples of short-term incentive plans included:
Annual incentive plan: A pay plan that rewards the accomplishment of specific results. Rewards usually are tied to expected results identified at the beginning of the performance cycle. Unlike bonuses, they are not primarily discretionary but may have a discretionary component.
Discretionary bonus plan: A plan in which management determines the size of the bonus pool and the amounts to be allocated to individuals after a performance period. This plan has no predetermined formula or promises and isn’t guaranteed.
Spot awards: Recognize special contributions as they occur for a project or task, generally accomplished in a short period.
Profit-sharing plan: A plan through which employees share in the organization’s profits. The plan normally includes a predetermined, defined formula for allocating profit shares among participants and for distributing funds accumulated under the plan. Some plans, however, are discretionary.
Gain-sharing plans: Any one of a number of incentive programs that share the results of productivity gains with employees as a group.
Team/small-group incentives: Any incentive program that focuses on the performance of a small group, usually a work team. These programs often are used when measurable output is the result of group effort and it is difficult to separate individual contributions.
Retention bonus: A payment or reward outside of regular salary that is offered as an incentive to keep a key person on the job during a particularly crucial business cycle.
Project bonus: A form of additional compensation paid to an employee or a department for successfully completing a project within a certain time frame.
In contrast, long-term incentive plans require employees to demonstrate sustained performance for more than one fiscal year. Some plans are based on common shares of the company and may require investment by employees, while others are based on financial performance and may be paid out in cash.
Publicly Traded Firms
The incentive-pay-practices survey report for publicly traded companies found that most respondents:
- Had a short-term incentive plan (99 percent).
- Made their officers/executives and exempt, salaried employees eligible for the annual incentive plan (96 percent) or bonus plan (97 percent).
- Offered the annual incentive plan or bonus plan to nonexempt, salaried workers (55 percent) and nonexempt, hourly, nonunion employees (53 percent).
- Used one to three performance measures to determine incentive/bonus payout amounts (56 percent).
Spot cash awards, profit-sharing, gain-sharing, team/small-group incentives, project bonuses and retention bonuses were most often offered to exempt salaried employees over other employee groups.
The two most common long-term incentive vehicles at publicly traded firms were restricted stock (offered by 88 percent) and stock options (64 percent). Digging down:
- Officers/executives were eligible for restricted stock from 84 percent of firms with a long-term incentive plan and stock options from 63 percent.
- Exempt salaried employees were eligible for restricted stock from 51 percent of organizations with a long-term incentive plan and stock options from 30 percent.
Privately Held Firms
The survey report for privately held companies reveals that from 2011 through 2013 the use of short- and long-term incentives remained generally steady at private companies. Short-term incentive use increased slightly to 97 percent from 95 percent at private firms, while long-term incentive use fell to 56 percent from 61 percent.
"Both private, for-profit companies and nonprofit organizations rely on short-term cash incentives to reward employees with plan-design features very similar to their public company counterparts," noted Bonnie Schindler, partner at Vivient Consulting. "The main difference is long-term incentives, where privately held organizations are focusing on long-term cash plans, rather than restricted stock or options. Cash is king, particularly when it comes to retaining top talent."
Private firms also significantly increased the variety of short-term incentives they provide:
- More than 75 percent of companies with a short-term incentive plan offered at least two programs.
- 39 percent of respondents reported that their company has four or more short-term incentive plans in place; this figure was only 23 percent in 2011.
- An annual incentive plan, the most prevalent short-term incentive plan at private companies, was offered to employees at the exempt, salaried level and above at most organizations.
- Long-term cash plans were the most prevalent long-term incentive vehicle, with 51 percent prevalence in 2013 (the same level reported in the 2011 survey).
"We believe the spike in the number of short-term incentive plans occurred because private companies are emphasizing short-term incentives over long-term incentives," said Schindler. "Private companies are motivating employees using more straightforward short-term plans based on cash because they have found short-term incentives to be motivational for executives and employees. Also, short-term plans are less complicated than long-term plans for private companies. Private companies are getting creative with short-term incentives by adding plans and are scaling back a bit on long-term incentives."
Nonprofits & Government
The survey report for nonprofit and government organizations shows that:
- 78 percent use short-term incentives, while 16 percent rely on cash long-term incentives.
- These organizations favor simplicity by operating a limited number of short-term incentive plans. Of the respondents, 68 percent reported having three or fewer short-term incentive plans in place.
- Most organizations (62 percent) rely on four to six performance measures in their annual incentive-pay plans, used to reward performance across several dimensions.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Related SHRM Articles:
- Shift to Variable Pay Motivates Success, SHRM Online Compensation, June 2014
- Not an Entitlement: Keep Bonuses Performance-Based, SHRM Online Compensation, June 2014
- Annual Incentive Metrics: Hit the Target, SHRM Online Compensation, May 2014
- Rewarding Stars in the Age of Flat Salary Growth, SHRM Online Compensation, November 2013
- Designing and Managing Incentive Compensation Programs, SHRM Toolkits, June 2013
- Ensure the Strategic Use of Stock-Based Pay, SHRM Online Compensation, May 2012
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