The Best Incentive Plans Are Easy to Understand

This morning I chatted with a Board Chair about how to implement a highly motivating compensation plan for his CEO.

I shared with him the most effective plans that I had ever utilized. They had these characteristics.

  1. Easy to understand. Incentive plans work best when the reward is easy to calculate. If you’re going to put an incentive plan in place, you want people literally walking around being motivated by the rewards they can receive.
  2. Not all or nothing. Plans that require 100% achievement are perceived as unfair because it doesn’t feel like there’s room to recognize the impact of something unforeseen – like a shutdown, or weather event, or a key illness, etc. Plans that are perceived as being unfair, aren’t motivating.
  3. Recognize over-achievement. Again, this is a fairness thing. If over-achievement is good for the organization then build it into the incentive plan. That way, a CEO (or anyone) with the potential to overachieve will stay motivated to perform. They will know they’re going to be recognized.

CEO Incentive Plan Example

Here’s a very simple incentive plan that I know from experience works very well.

% of Plan Achievement

 % of Inventive Bonus

< 79%

0

80% – 99%

80%

100% – 109%

100%

110% – 119%

110%
120%+

120%

 

If over-achievement is desirable, this scheme can be made stronger by using a progressive reward system beyond 100%. For example – over 120% achievement – 130% of incentive bonus.

This plan works because it’s straightforward, easy to calculate and fair.