Incentive Compensation

The payment of the normal wages and salary is not a sufficient motivator. The appropriate planning/arrangement of the incentives compensation is a very significant tool that leads to the efficient and successive management of a company. The effective incentive compensation planning makes the company to achieve in various fields such as promoting the performance of employees, promoting retention of employees, attracting the skilled staff, and promoting the general image of the company. If the incentive compensation is not well planned, it will make a company to experience a financial crisis which will affect the health of the company. Because of this, the interests of the employees and the executives should be aligned through appropriate incentive compensation structures. This paper discus the main issues that a company need to consider when designing an incentive payment plans.

Issues considered in design of incentives compensation plan

In the designing of an incentive compensation plan, the pay-for-performance culture should be established where the incentive structures are properly connected to the general performance of the company. To facilitate the achievement of desirable outcomes, the culture of the company should be based on the merit and performance of the individuals. Good work culture of quality improves the performance management of the company and it can be a challenge to the implementation of incentive compensation if it not well developed. For instance, this culture should include the performance determinants such as the employees control performance, the ability of employees to increase performance, the perspectives of the employees towards the value of the incentives, the employees believes that good performance is rewarded and the understanding of the employees that the value of the incentive given is enough to require more efforts (Schenk H, Erasmus B, Swanepoel B & Wyk M. 2003).

The company should ensure that the incentive compensation scheme is acceptable to employees. Also, the company should ensure that all the organizations such as the trade unions and workers unions that represent the workers. To ensure this, the company should establish an effective communication of the benefits to its employees, encourage the employees to administer the incentive scheme and establish an appropriate connection between performance and incentive compensation (Schenk H, Erasmus B, Swanepoel B & Wyk M. 2003).

The company should consider the complexity of the incentive design. In this case, the incentive compensation scheme should be made simple so that it can be comprehended by all company employees (ECI).This will enable the employees to determine the value of their incentives and will enable the company to determine the appropriate piece-rate plan to be applied. The differential piece rate plan is when the company gives small piece rate to the employees up to the set standard and higher rate for the employee's performance that is above the set standard. On the other hand, the straight piece rate plan gives the employee a set reward for the minimum output and a piece rate incentives for the output that is above the expected standard (Schenk H, Erasmus B, Swanepoel B & Wyk M. 2003).

The company should consider the integration with total incentive compensation program. For instance the management of the company should determine and weigh all the possible impacts that may be brought about by their incentive compensation plans on the costs of compensation e.g. the reduction of employees' salaries to create bonus. The effective incentive plan should be considered with respect to other benefits programs such as life assurance, pension and the sharing of profits. The company should ensure that their incentive plan do not interfere with the implementation of these benefit programs.   Also, the consider making their plan more comprehensive so that it incorporates other aspects such as the growth of revenue, productivity and others instead of considering only net profits only (ECI).

Most importantly, the company should put into consideration the issue of discrimination so as to limit the possibility of rewarding people in relation to their gender, family background, ethnic origin and political orientation. The plan should also consider the employees with different forms of disabilities. Therefore, the company management should adhere to the government laws and programs that avoid any practice of discrimination at work places and all the employees of the company should get access to the incentive compensations that are available (Ferris R, Rosen D & Barmun T. 1995).

Finally, the effective administrative guidelines should be considered in designing the compensation plan. These guidelines are important in reducing some employees' subjections to when the awards are determined. These guidelines also take care of the company's contemporary issues such as retirement, death and termination of the employment among the employees. In addition, these plan guidelines will help the company in making appropriate adjustments to the incentive payments in a given time depending on the conditions and status of the company (Upadhyay S. 2009).

To ensure effective incentive compensation plan, the company should establish the pay-for-performance culture where the incentive structures are properly connected to the general performance of the company, ensure that the incentive compensation scheme is acceptable to employees, consider the complexity of the incentive compensation design, consider the integration with total incentive compensation program, consider the issue of discrimination and adopt the effective administrative guidelines that concerns the incentive payments.