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Designing an Incentive Compensation Plan

There are various key issues that a company should consider when designing an incentive compensation plan; such issues ensure that there is a fair and equal bonus distribution plan. One of the key issues that a company should consider is involvement of its senior managers and other employees. Brown & Purcell (2007) argued that when a company is developing or changing its reward strategy, it should involve its line managers and its employees. The two cited the John Lewis Partnership in their endeavor to show the benefits of involving the management in compensation plans. The partnership has comprehensively involved employees and managers in every stage. This brings about a two way communication in establishing the compensation scheme. This would ensure that the plan is properly designed and well implemented. The compensation scheme is a very important tool in linking a company strategic and operation plans to the rewards it provides to the employees, thus it should involve it employers and employees in its implementation so that it achieves the purpose for which it was established.

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Secondly the company should establish whether the scheme will be on contractual or non contractual basis. If the scheme is to be on contractual terms, the agreement between the employees and employers will be managed by the terms set in the agreement. Dixon and Sueda (2009) said that the contractual foundation provides managers with an immense elasticity in compensation of employees' structures. Defining whether the scheme is on contractual or non contractual basis prevents discrimination in payments between sub-standard performers and superior performers over the term of the plan. Most existing compensation plans discriminate over payment plans because of the way their compensation plans are designed. Other schemes do not distinguish the virtual performance of employees over the term of plan. Dias(2007) proposed that certain factors should be considered when setting up bonus schemes; such factors are whether the scheme is on contract or not, whether there is desertion to award, whether it is conditional(individual or company performance), its practicalities, maximum and /minimum payment method and payment or termination. Dias further expounded on these points where she argued that a compensation scheme whether contractual or non contractual will depend on the circumstances such as the customs and practices of the firm. Non contractual terms are not sufficient because the employee is usually at the employer's mercy and this may bring about discrimination.

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The scheme should also clearly state its objectives. According to the Encyclopedia of Business (2010), the critical objectives of administering compensation are: efficient preservation of a workforce that is productive, equitable pay and fulfillment of regulations which are set by the federal, state and local based on what a company can manage to pay. The compensation plans may have other objectives and it should also have a plan concept which addresses various questions. The plan concept may address questions such as the level and types of personnel that the plan will cover, whether the plan will provide deferred compensation, whether the plan has been set to attract new personnel or to compensate those who portray increased performance and whether the compensation plan should reward division, corporate of individual performance or a combination of the three.

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The compensation should also be easily understood by the employees for it to be effective. Most compensation schemes are usually straightforward and uncomplicated and easily convey the message. Complicated plans are usually difficulty for the employees to understand and thus it is hard for even those in the senior management to comprehend or track progress of the compensation plan or the prospective incentive payments. According to the Network Marketing Business School (2008), the best compensation plan is easy to explain and understand, prospects usually feel more confident in their ability to join a business if the compensation scheme is easy to comprehend. A compensation plan should be all-inclusive. The plan should state whether other measures of performance will be considered. Most compensation schemes base their pool on the net profits accrued by the company. A good compensation scheme should reflect on other objectives such as productivity, growth of proceeds and division productivity among others.

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The plan should also consider how the bonuses will be disbursed to employees. The disbursement may be monthly, quarterly or yearly. Goodale (2001) proposed that an effective compensation schemes distributes bonuses more frequently to employees. He argued that for a company to motivate the staff to work hard, come up with cost saving procedures or manage projects that meet deadlines and budgets, they have to comprehend the connection between the employers' performance and the rewards that come from it.

A company should also consider the outcomes that an incentive plan will have on the total direct compensation costs. For instance the company should consider whether salary increments should be cut down so that some employees may be eligible for the compensations. Goodale (2001) argued that it is crucial to appraise the relative contribution of the employees and to adjust salaries when warranted since the bonus distributions are directly linked to ones salary. The company should also establish whether they should assign an individual the task of overseeing the compensation plan. It should also determine whether there will be a person who will manage the plan once it is launched and whether it should use its employees or outsiders. This ensures that the compensation plan is fair in administering bonuses and compensations. According to Srinivasan (2009) a company should designate a person to manage the compensation plan and should assess whether the position is permanent or temporary.

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