Why should my company use a short term incentive plan?
Companies that use Short term incentive plans (STIP) to recognize and reward employees for their contributions and achievements report higher levels of employee engagement (89%), retention (87%), and loyalty (85%) compared to those that do not use incentives. Short term incentives are essential in today’s changing economy and job market.
What is a short term incentive plan?
A short-term incentive plan is a compensation structure implemented by companies to motivate and reward their employees for achieving specific short-term goals or objectives. These plans are typically designed to provide employees with extra compensation beyond their regular salaries or wages when they meet or exceed certain performance targets within a relatively short time frame, often a year or less.
Short-term incentive plans are commonly used to align employees’ efforts with the company’s immediate strategic objectives. These objectives could include financial targets such as revenue, profit, or cost reduction goals, as well as non-financial goals like customer satisfaction, project completion, or safety milestones.
How do you structure a short term incentive plan?
The structure of short-term incentive plans can vary widely depending on the company’s industry, size, and specific goals. Some common features of these plans include:
Performance Metrics: The company identifies key performance indicators (KPIs) or objectives that align with its short-term business goals. These could include financial targets (e.g., revenue, profit margins) or non-financial goals (e.g., customer satisfaction scores, project completion deadlines). To learn how to build effective KPI’s download our resource.
- Performance Thresholds and Targets: Plans typically include specific performance thresholds (minimum requirements) and performance targets (desired levels of achievement). The incentives awarded might increase as employees surpass these targets.
- Payout Formula: The formula used to calculate the incentive payout based on the level of achievement. This formula can be linear (proportional to performance) or might include accelerators for surpassing certain levels. ourlinQ has a personalized dashboard for each employee with our software. This takes all the guess work out of the payout and shows employees in real time where their incentives lie. Schedule Demo
- Payout Timing: The timing of when incentives are paid out can vary. Some companies might pay them on a quarterly, semi-annual, or annual basis, depending on the plan’s structure.
- Communication: Clear communication of the plan’s details, metrics, and potential rewards is crucial to ensure employees understand how their efforts contribute to their potential incentives. A bonus plan without transparency is ineffective.
- Eligibility: Not all employees might be eligible for short-term incentives. Typically, eligibility is based on an employee’s role, level, and how directly their performance influences the specified metrics.
Types of Short Term incentive Plans
There are several types of short-term incentive plans that companies can implement to motivate and reward their employees based on specific performance goals. Here are some common types:
- Performance-Based Bonuses: This is one of the most straightforward types of short-term incentive plans. Employees receive a bonus when they achieve or exceed predetermined performance targets. The bonus amount can be tied to a percentage of salary, a fixed amount, or a combination of both. We love to pay for performance. Motivating your employees to do more with incentives is a great payout for both the employee and the owner of the company. Pay for Performance
- Sales Commission Plans: Common in sales-oriented industries, sales commission plans reward employees based on the value of sales they generate. Commissions can be a percentage of the sales amount and might also have tiers where higher sales volumes lead to higher commission rates.
- Profit-Sharing Plans: In profit-sharing plans, employees receive a share of the company’s profits based on predefined criteria. The distribution of profits can be determined by factors such as an employee’s salary level, position, or tenure.
- Spot Recognition Awards: Spot recognition awards provide immediate rewards for outstanding performance, often in the form of cash bonuses, gift cards, or other tangible rewards. These awards are typically given on the spot when employees excel or achieve exceptional results.
- Project Completion Bonuses: Employees are rewarded for successfully completing specific projects within a set timeframe and meeting predefined quality or performance standards.
Companies often tailor these short-term incentive plans to their specific industry, organizational culture, and strategic goals. The choice of plan depends on the nature of the business, the desired outcomes, and the roles of employees within the company.
Cons of Short Term incentive Plans
While short-term incentive plans can offer numerous benefits, they also come with certain drawbacks and challenges. Here are some of the cons associated with implementing short-term incentive plans:
- Focus on Short-Term Goals: Short-term incentive plans, by their nature, prioritize immediate performance goals and outcomes. This can lead to employees focusing on short-term gains at the expense of long-term strategic objectives, which could hinder the company’s overall sustainability and growth.
- Risk of Disengagement: If the incentive targets are set too high or are perceived as unattainable, employees might become discouraged or disengaged. Conversely, if the targets are too low, employees might not be motivated to put in extra effort, assuming that rewards are easily achievable.
- Potential for Unintended Consequences: Employees might prioritize the specific metrics tied to incentives, leading to potential negative consequences such as a narrow focus on meeting those metrics at the expense of quality, ethics, or cooperation with colleagues.
- Subjectivity and Bias: The process of determining performance metrics and assigning incentives can be subjective, leading to concerns about fairness and bias. This can erode trust and lead to disputes among employees if they perceive favoritism in the evaluation process.
- Costs and Budget Impact: Implementing short-term incentive plans can be costly for the company, as they involve additional compensation beyond regular salaries. In times of economic uncertainty or budget constraints, the financial burden of these incentives might strain the company’s resources.
It’s important to note that while short-term incentive plans have potential drawbacks, they can be effectively managed and mitigated through thoughtful design, clear communication, and a comprehensive approach to employee motivation and recognition. Companies should carefully consider the pros and cons when designing their incentive programs and tailor them to align with their organizational goals and values.
Benefits of short term incentive plans
Short-term incentive plans offer several benefits for both employees and employers, helping to drive performance, motivation, and alignment with company goals. Here are some of the key benefits of implementing short-term incentive plans:
- Motivation: Short-term incentive plans provide employees with tangible rewards for achieving specific goals within a relatively short time frame. The promise of extra compensation can significantly increase employees’ motivation to perform at their best and strive for excellence.
- Performance Alignment: These plans help align employee efforts with the company’s immediate goals and objectives. When employees see a direct connection between their performance and rewards, they are more likely to focus on tasks that contribute to the company’s success.
- Goal Achievement: Clear and measurable performance metrics are established in incentive plans. This clarity helps employees understand what is expected of them and provides a roadmap for achieving their goals. KPI’s
- Employee Engagement: When employees are actively working toward goals tied to incentives, they become more engaged with their work. Engagement can lead to higher job satisfaction and a stronger commitment to the company.
- Improved Productivity: With the prospect of extra compensation, employees often increase their productivity to meet or exceed performance targets. This can lead to improved efficiency and output across the organization.
- Attracting and Retaining Talent: Well-structured short-term incentive plans can make a company more attractive to potential employees and enhance employee retention. Job candidates are more likely to be interested in positions that offer performance-based rewards. 5 Steps to Build A Better Bonus Plan
- Recognition and Appreciation: Short-term incentives serve as a form of recognition and appreciation for employees’ efforts and accomplishments. This recognition can boost morale and create a positive work environment.
- Flexibility: Short-term incentive plans can be adjusted and modified more frequently than long-term plans, allowing companies to adapt to changing business conditions and goals.
- Rapid Response to Business Needs: These plans allow companies to quickly motivate employees to respond to specific business challenges or opportunities, such as launching a new product, meeting a sales target, or addressing a sudden market shift.
- Immediate Impact: Short-term incentives provide a swift response to performance improvements. Employees can see the results of their efforts and receive rewards relatively quickly, which enhances the sense of accomplishment.
- Performance Differentiation: Incentive plans can help differentiate high-performing employees from their peers, which can contribute to a culture of meritocracy and encourage healthy competition.
- Financial Performance: When employees are motivated to achieve financial goals tied to the company’s success, it can positively impact the company’s financial performance, such as increased revenue, profitability, or cost savings.
- Foster Continuous Improvement: Regular assessment of performance metrics encourages employees to continuously improve their skills and processes to maintain or exceed their performance levels.
Examples of Short Term Incentive Plans
ourlinQ is in the business of incentives. We have an entire resource catalog of steps to help you make a short term incentive plan.
Whether building a short term incentive plan or a long term incentive plan you have come to the right place.
“Incentives are spurs that goad a man to do what he doesn’t particularly like, to get something he does particularly want”
We love seeing the success companies have from building incentive plans for their employees that motivate performance. Head to our resources page for more downloadable’s to help you build something amazing. To answer our question above, Why should my company use a short term incentive plan? Incentive plans are great catalysts in employee retention, goal achievements, motivating performance and so much more.
Schedule a demo to learn about ourlinQ’s software and the benefit of using a software that motivates a teams performance to exceed expectations.
