Incentive scheme

economic-dictionary

An incentive scheme is a motivational tool that seeks to align the interests of workers with those of the company.

The incentive scheme must then allow the company to better achieve its objectives. This, through ensuring that workers exceed the expectations of their position and promote the growth of the firm.

Design of the incentive scheme

The design of the incentive scheme is directly related to the definition of the company's objectives. Thus, for example, an incentive scheme may be aimed at attracting and retaining the best candidates, achieving certain sales goals, or reducing costs, among many others.

Whatever the objective, the incentive scheme must meet certain basic characteristics:

  • Clear objectives: Clearly establish the objectives and the period of time in which they are to be achieved (short, medium or long term). Likewise, it must be defined if the goals are objective or subjective, that is, if they are observable (for example, sales) or they are estimated (for example, involvement with teamwork).
  • Determine the budget: Define the amount of resources allocated to the incentive scheme (including implementation costs and awards).
  • Establish units and points of measurement: You must define what is the target's unit of measurement (money, units, hours, etc.) and how often it will be measured (monthly, semester, annually, etc.).
  • Flexibility: It is necessary to allow some flexibility in the awards and measurements because the objectives can change over time. Thus, for example, the first year may be more important to focus on the launch of the product, while in the following years it may be to control delinquencies or expand markets, etc.
  • Transparency: Workers must be perfectly informed of the objectives set and how much they can achieve if they make an effort.
  • Equality: It is good that there are no differences between workers and that they all face the same conditions. Otherwise, rivalries and envies are generated that limit healthy competition.

Examples of incentives

There are different incentives that can be used to motivate workers. Here we describe some of the most used:

  • Profit sharing: Allowing workers to obtain a part of the benefits that the company achieves during a certain period. In this way, if the company does well, the workers do too.
  • Bonus per project: It is awarded to a team or a particular worker when the objectives of a certain project are achieved.
  • Stock options: Workers are given the option to buy company shares at a fixed payment regardless of the current stock market price. Holding shares would push them to increase the value of the company.
  • Commission for sales: The worker is allowed to keep a percentage of the sales that he manages to make.

Functioning of the incentive scheme

Generally, the application of an incentive scheme has the following stages:

  1. The management defines the objectives and establishes the terms of the scheme.
  2. The administration makes the scheme known to the workers through memos, meetings or emails.
  3. It is evaluated if the workers have complied with the conditions of the scheme, according to the measure and the previously established frequency.
  4. When an employee meets the conditions, management rewards him with an incentive.

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