What are some types of incentives for business units?

There are three basic types of short-term business unit incentive plans with varying degrees of risk/reward potential. Starting with the plan offering the lowest risk/reward potential and moving to the one with the highest potential, the three types of plans are:

1. bonuses,

2. incentives (group or individual),

3. commissions.

Bonuses are discretionary payments where specific reward criteria have not been pre-communicated. They offer the advantages of providing flexibility, ease of maintenance and some financial incentive. However, the link between performance and reward is weak. Also, bonuses can be difficult to administer due to subjectivity, and they have high fixed costs.

For more about bonuses, see What kinds of bonuses can be offered? at ¶32,410 .

Incentives are associated with pre-communicated criteria and subjective evaluation. They provide financial incentive, but also control fixed costs and encourage teamwork. The downside to incentives is that they require maintenance and increase expense potential. They can also discourage mobility as a group plan.

Commissions provide the maximum financial incentive and a direct link between performance and reward. They also reduce fixed costs (base pay), are easy to administer, and attract risk-oriented people. These advantages, however, must be balanced against disadvantages such as the necessity of maintenance, increased expense potential, reduced managerial control due to commission-driven behavior, and discouragement of teamwork.

When selling consists primarily of accepting the customer's money in return for what is being bought, the salesperson is usually paid a straight salary or hourly rate. Commissions for salespeople come into play when the salesperson is being entrusted with finding the customer, or with persuading a customer whom management has found.

In practice, most commission sales jobs include a base salary. Among other considerations, the minimum wage law may require it in the event that low commissions in a week fail to satisfy the minimum wage standard. But to earn only the base is to sell so little that management would prefer, if the pattern continues, that another person assume the job.

In practice, most commission sales jobs include a base salary. Among other considerations, the minimum wage law may require it in the event that low commissions in a week fail to satisfy the minimum wage standard. But to earn only the base is to sell so little that management would prefer, if the pattern continues, that another person assume the job.

What are the objectives in using business unit incentives? The objectives in using business unit incentives are to attract qualified individuals, to motivate employees, to facilitate achievement of the business' objectives where risk is present, to control fixed costs and to communicate the philosophy of management.

Who should be eligible? In deciding which employees should be eligible, competitive practices should first of all be examined. But eligibility should in any case be limited to employees who can impact unit results. This approach requires that performance be measurable and, accordingly, the approach should be limited to departments where (and people to which) such can be done.

What should the award level be? Competitive practices should again be looked to in deciding what the award level should be. Employers should then determine the position to take relative to the market and the appropriate mix of incentive and base pay.

What else should employers look at? There are four basic incentive components that employers must address:

1. The rate at which variable compensation increases as participants achieve greater results (reward/risk mix);

2. Whether the variable compensation will increase in equal proportions as greater results are achieved (linear), in increasing proportions as greater results are achieved (accelerating) or in decreasing proportions as greater results are achieved (decelerating);

3. Whether the variable compensation will take effect only after a certain level of results are achieved (threshold); and

4. Whether the variable compensation will be limited to a maximum level (cap).

Other considerations include benefits integration, the timing of payments, deferrals (to facilitate employee retention), payment upon termination, minimum funding (including discretionary reserves) and monitoring.