Associates in Applied Psychology offers comprehensive services in the design and communication of short-term (usually a one year timeframe) and long-term (usually a two to four year timeframe) cash incentive plans. These plans are formula-driven, by financial measures (return on equity, return on assets, return on capital, etc.), and deliver a payout to employees which is typically correlated with level of performance on the financial measures.

It should be pointed out that incentive plans are not “bonus” plans. Bonus plans are purely retrospective and not formula-driven; management makes a decision at the end of the year that the financials turned out well enough that the organization should be benevolent and provide a little extra compensation to employees. Unlike true incentives, bonuses lack definitions of the financial objectives and any prospective contingent reward for meeting the objectives, and therefore have very little power to motivate.

While incentive plans are much more common for managers and higher-level professionals, the last 10 to 15 years have witnessed a sharp increase in their utilization at the lower levels of organizations. This is because, when designed and administered properly, they provide a highly effective means to motivate performance and leverage compensation costs provisionally against outcomes that actually impact the organization’s profit-loss.

The design of incentive plans requires a review of the above types of financial ratios for the organization over an extended period (typically 10 years) and ideally incorporates comparable data for peer organizations. Often some portion of pre-tax profit forms the basis for a funding pool with a schedule of the other financial measures determining the amount of the pool available to reward plan participants. This type of arrangement ensures that there is no risk of the organization paying when results are below an acceptable level for the period.

Normally, a formal plan document outlines the key elements of the incentive plan. This document forms the basis for communication of the plan to the participants. Clear plan communication to participants is critical because in order for the plan to stimulate achievement behavior it must create a definitive line of sight from employee performance to rewards.

The specific elements of the plans, of course, vary. Indeed, no two plans we have designed have been alike or even highly similar. Nevertheless, the final document produced will usually address: 

• Background and rationale
• Participants
• Eligibility requirements
• Pool funding formula
• Schedule of financial performance measures relative to payout
• Pro rata payout for partial plan period
• Forfeiture
• Board discretion for application and revocation

All incentive consulting is designed and managed by Charles F. Schanie, Ph.D. Dr. Schanie has more than a decade of experience in incentive design and implementation. Over the course of his career he has conducted more than 25 projects in this area. His clients in short-term and long-term incentive consulting have included: Merchants National Bank, Ambrake (Akebono), Maxon Corporation, Asahi Glass Corporation and Miami University.

We welcome all requests for proposals (RFP’s) for human resources services. And if for some reason you don’t need a full-blown project, but would like some over-the-shoulder support or hand-holding, we’re prepared to consult with you on an ad hoc basis at our daily consulting rates.

Call us today at 502-584-2112 for a free telephone consultation on your current needs in cash incentive design.