The 4 Essentials of Effective Incentive Plan Management

Often, many view the introduction of a newly introduced program or other completed initiative as the end of something – another project to check off a “to do” list. This can certainly be true with the launch of a new incentive program and a long-term plan in particular. In reality, when it comes to introducing any new compensation strategy, the most important work begins once the plan is rolled out. Without a strategy for the ongoing maintenance and promotion of the plan, it can quickly become a vague memory to all involved as administrators and participants alike get engrossed in their day-to-day activities.

Our firm has been designing short and long-term value sharing plans for many years. I have been responsible for servicing the plans we’ve helped our clients develop and making sure they are meeting the outcomes they are intended to realize. Based on my experience in that role, I have identified four areas of plan management that must be effectively addressed if a rewards program is to be successful:

  1. Promote (Don’t Just Communicate) – Certainly, it’s important to communicate the “what, when and how” of any plan a company introduces. However, beyond just announcing a plan, it must be effectively promoted. This can be challenging with long-term plans because often the value is only measured once per year. It can be difficult to find a valid reason to discuss it when there isn’t anything new to report. However, businesses that have had the most success have found a way to keep the plan in the forefront of their employees’ minds on a regular basis. At regularly scheduled meetings throughout the year, they remind the workforce of the company’s objectives, what each employee’s role is in their achievement and how fulfilling those stewardships will increase the value of their incentive plan.
  2. Ensure Legal Compliance – We recommend that plan documentation be reviewed annually to ensure that nothing is missing (e.g., an amendment that was drafted but never executed) and to determine if there are any new laws or rulings that might warrant a plan amendment.
  3. Monitor Financial Impact – During the design phase, the company makes certain assumptions about future performance to help determine how the plan should be structured. It’s important to monitor and re-cast the financial projections regularly (we typically recommend annually) to plan accordingly for future payments and determine if amounts that have been set aside to fund the obligation are sufficient.
  4. Perform Annual “Line of Sight” Review – The “Line of Sight” review rolls items 1 -3 into a high level view of the plan intended to help assess whether key managers share the company’s vision and determine if the incentive plan appropriately supports that vision and rewards those who help achieve it. This is typically done by surveying the participants to assess how much they understand, value and believe in the plan. Survey results should lead to recommended actions for the coming year. To be most effective, the conclusions and action items should be shared with the CEO or members of the Board. Periodic updates on compliance and financial issues that are critical to the plans’ success should also be communicated to those responsible for making adjustments in the plan. This can be done most effectively when a company forms a compensation committee that includes the CEO and others responsible for the strategic direction of the company.

By focusing on these four areas, a company can ensure that its incentive plan remains a relevant and integral part of achieving the company’s overall growth goals.

To learn more about how these four areas impact a plan’s success, view a webinar on this subject:

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