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Automating Software for Objective-Based Incentive Compensation Programs
By Sunil Ciszewski, PMIS Technologies
Growing Use of Incentive Compensation Requires Increased Governance
Incentive compensation programs are multiplying at most companies. Two factors are driving this growth: 1) an increased focus on performance management, and 2) the inability of annual increases to fully recognize exceptional contributors.
The use of incentive plans for executives, managers and sales personnel has a long history. However, other employee groups including production, customer service, research, engineering, and work teams are now getting their own incentive programs. Each new pay plan seems to have its own rules and policies. It is not surprising that senior management expects greater corporate governance to ensure that these pay plans align with corporate policies.
How can employees who are not directly responsible for revenue generation best participate in an incentive program? The answer lies in objective-based reward programs. These programs allow managers to establish specific goals for units and individuals, or a combination of business and individual goals, including non-revenue goals. Employees earn incentives based on different levels of performance.
What Is An Objective-Based Incentive Reward Program?
In a typical objective-based incentive reward program, managers and supervisors (people who have direct supervisory control of employees) set goals for their employees. Some programs stipulate employee involvement during the goal-setting process, allowing them to review goals and provide feedback to their manager. Other programs assign responsibility to the manager to set the goals without employee involvement. At the end of the performance measurement period, managers score the employees on performance (which results in a dollar payout). Managers must record their perspectives on employee performance, and some companies allow and record employee commentary on these ratings.
Types of Programs
Here are descriptions of some typical objective-based incentive reward programs:
- Management By Objectives.
Management By Objectives (MBO) has a long and distinguished history of helping companies translate corporate goals into specific accountabilities for individual contributors. These programs are sometimes called Key Performance Objectives (KPO) programs.
- Management Incentive Plans.
Management Incentive Plans (MIP) provide focus to senior managers. Normally used to calculate the annual bonus payment, MIP often links rewards to both business results and individual contributions.
- Key Sales Objectives.
Key Sales Objectives (KSO) programs provide field sales management with another tool to encourage sales success. KSO programs sometimes work with transaction-based incentive plans, or provide the sole measurement for sales success.
- Shared Goals Programs.
Shared Goal Programs (SGP) leverage the power of work teams by using a combination of unit and individual performance to reward goal accomplishment.
- Merit Increase and Merit Award Programs.
Merit Increase and Merit Award Programs measure and reward individual effort on an annual basis. For merit increase programs, the rating of goal accomplishment provides the basis for granting a base pay increase. Merit Award Programs split annual pay adjustments into two elements, a market base pay adjustment and an individual lump-sum merit award.
- Campaigns, Contests and SPIFS.
Short-term programs give management the ability to provide focus on immediate objectives.
Performance Appraisal—What's the Difference?
What is the difference between an objective-based incentive reward program and an employee appraisal process? On the surface the answer may appear semantic, but a deeper look shows substantive differences.
An incentive reward program is distinct from annual salary treatment. Employee annual performance appraisals often serve multiple HR programs, including career planning, training objectives, job knowledge, qualitative measures and, of course, the annual salary review.
On the other hand, objective-based incentive reward programs require managers to set specific objectives and describe various levels of achievement. Goals should be clear, concise, and achievable within the performance period. Best practices encourage employees to provide input into the goal-setting process.
Automate Your Pay Program
What role does automation play in helping to increase the effectiveness of an objective-based incentive reward program? What advantages can using an automated system provide that using an ad hoc desktop solution (e.g., spreadsheet) cannot?
Automation can be a key success factor for your objective-based incentive reward program. It enables tracking of information about the structure of the program, records and maintains employee information, produces incentive payouts, and can easily produce reports that employees and managers can use. Most systems also provide auditing features. This is a significant improvement over Excel-based systems utilizing email for communication. While these desktop systems can be dazzlingly elaborate, they are always inferior to a central data base system that allows control, consistency, and advanced reporting.
Transparency Is the Key
One concern of objective-based incentive reward programs is that they can become a "give-away" program. Local managers are under intense pressure to provide payouts, although not always fully justified. A centrally automated program can effectively combat this outcome by providing full transparency to the objectives, ratings, and payouts. For example, summary comparison charts can immediately identify managers with scoring biases.
Performance Management Incentive System (PMIS)
Our system, called Performance Management Incentive System™ (PMIS), is a prime example of the software that you can find to help you administer your objective-based incentive reward program. PMIS concentrates on doing one thing really well: it records performance goals and rewards achievement of those goals. Unlike the other software providers in this space, we are not an add-on to an Enterprise Incentive Management system, or an HRIS system. We focus exclusively on providing you the tools to track, audit, report, and pay employees for specific goals.
And PMIS's advanced feature set supports a collaborative goal-setting process. PMIS makes the entire workflow process much more user-friendly by providing features for managers and employees to work together during the goal-setting and scoring processes, and makes possible the use of best practice techniques to administer a rewards program.
To learn more about the Performance Management Incentive System™ (PMIS) click on this link: www.pmistechnologies.com.
About the author: Sunil Ciszewski is Program Manager for PMIS. You can reach him at sciszewski@pmistechnologies.com.
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