Incentive schemes can play a crucial role in creating an effective and highly motivated workforce. From bonuses and commissions to employee share plans, goal-based reward packages can drive individual performance, act as a catalyst for improved teamwork and improve overall levels of motivation. However, before implementing an incentive initiative, it is vital to define objectives and design schemes that will deliver on those goals.
Incentive schemes tend to be part of the fabric of working life in sales departments where it is relatively easy to reward employees on the basis of performance. Elsewhere in the organisation it can be trickier to set targets or triggers for bonuses, but it is certainly not impossible. And while the benefits of incentivising the wider workforce may not be as immediately apparent as they are in a sales environment, there are tangible gains to be had. For instance, by setting targets for call centre staff based on customer retention figures, you can reinforce the importance of reducing client churn.
Incentive schemes can do more than push staff towards the achievement of performance-related goals. They can also help with recruitment and retention, generate loyalty and encourage staff to work as a team. The key is to choose schemes that are aligned with your goals.
Financial and non-financial schemes
Broadly speaking, incentive and reward schemes fall into two camps: financial and non-financial. Non-financial schemes include benefits (pensions, childcare vouchers, health cover, etc) and perks, such as company cars or discounts on products. So-called ‘flexible benefit’ or ‘flex’ schemes have grown particularly popular in recent years. Flex schemes vary, but broadly speaking they allow workers to select from a budgeted menu of benefits. Thus, a worker may choose a smaller salary in return for higher pension contributions or longer holidays.
These non-financial reward schemes don’t necessarily drive performance as there usually isn’t a link between the rewards on offer and the achievement of goals. But they are seen as a way to attract, retain and motivate staff and, in the case of ‘salary sacrifice’ benefits, there can be tax gains for both employer and employee. Financial benefits, on the other hand, can be directly linked to performance targets. This category includes bonuses, commissions and share option schemes.
With all incentive strategies, the key to success is to establish clear objectives and to design a scheme that rewards staff in accordance with specific goals and targets. Even subtle differences to a scheme can impact on behaviour. For instance, in a sales department, commissions on individual sales will certainly motivate staff members, but they won’t necessarily raise the sales bar to the levels you would like. Bonuses based on targets paid to individuals or the team as a whole will continue to motivate on individual sales while also laying down a clear marker on expected performance.
The sale bonus principles can be applied elsewhere. The target might be reducing customer churn to a certain level. Alternatively, you could reward the workforce as a whole if certain revenue or profit targets are achieved. Schemes of this nature tend to drive group rather than individual performance and can have a beneficial impact on teamwork and morale.
Share option scheme
While bonuses and commissions provide an effective means to reward individual or group performance, they don’t necessarily encourage employees to feel they have a stake in the business. Employee engagement can be an important factor in moving a company towards a longer-term objective. Let’s say an entrepreneur is working towards a flotation on a public market or a trade sale. He or she will have a clear incentive to achieve the highest possible valuation in order to maximise the amount that can be realised from such an event. The same won’t necessarily be true of employees. Grooming a business for an IPO or exit may require employees at all levels to go that extra mile in terms of long hours and hard work, but the reality is that they may be less than willing to do this unless there is something in it for them.
Here’s where share schemes come in. Broadly speaking, bonuses based on monthly or annual performance are a short-term incentive. Share schemes on the other hand encourage staff to take a longer-term view as they will stand to gain if the value of the company increases over time.
Equity in a business can be transferred to employees in the form of actual shares or options. In the case of share option schemes, employees are given the right to buy shares at a later date, with the price fixed at current valuation. If the price is agreed at, say, £1 today and the value rises to £10 over a period of years then the employee stands to make a healthy profit if and when the option is exercised.
One benefit of an option scheme is that it potentially locks key members of staff into the company for a period of years. Those who leave early forego their right to exercise their options and if the company is growing rapidly this would see them losing out on the opportunity to sell their shares and profit from that growth.
In the past, option schemes have been seen as a means for young companies with high-growth potential to attract high-calibre staff without having to pay high-calibre wages. In the current economic climate, however, few employees would accept a below par salary on the promise of jam tomorrow through an equity pay-off. Thus, option schemes should be seen in terms of their ability to motivate rather than as a substitute for salary.
The alternative to an option initiative is an award of actual shares to key employees or the workforce as a whole. These awards will have an immediate value. The downside for the employee is they will be immediately taxable as income. As with bonuses, share and share option schemes can be linked directly to performance targets. For instance, the right to exercise share options could be made dependent on the business achieving specified revenue or profit goals.
All incentive schemes should be considered carefully and businesses should thoroughly explore the tax implications, the targets underpinning the scheme, and the impact on employee behaviour, e.g. will the scheme achieve the desired result? It’s not something to undertaken lightly, but incentivising employees can deliver significant benefits to fast-growth businesses.