Short-term and long-term incentive plan use continues to be on the rise at private, non-publicly traded companies, as well as at nonprofits and government organizations (NGOs). This is according to recent research conducted by Vivient and WorldatWork. The key takeaway? In a tight labor market, smaller companies and organizations use incentive payouts to level the playing field with larger competitors vying for the same top talent.
Indeed, employers at all levels have been increasingly implementing incentive plans while holding the line on base pay. Incentive plans take different forms but are variable pay that must be re-earned by hitting goals and objectives during a given period, typically monthly, quarterly or annually. As noted in my book, Compensation Sense 101, the most frequent short-term incentive [STI] plans include Goal Sharing or Gain Sharing (which are company-wide plans), as well as Manufacturing or Production Plans, Management Plans, Team Plans, Sales Compensation Plans, and Customer Contact Plans.
Properly designed incentive plans can help drive job performance, behaviors and results needed to achieve business objectives. What’s more, if incentive plan goals are tied closely to objectives an individual can truly influence, these goals can help keep employees engaged and motivated to deliver better bottom line results. Incentive plans also can help attract and retain employees. This is especially true, it seems, for executive and management positions.
Annual incentive plans (AIPs) are the most common type of short-term incentives, or STIs. The Vivient/WorldatWork study found that "nearly all private, for-profit companies provide some form of" STIs.
Long-term incentive [LTI] plans, meanwhile, are usually in place for three to five years and are typically designed for senior management or very high-level individual contributors who can strategically and significantly drive business results. Such LTI reward programs typically include Stock Plans and Cash Plans. The study found that "more than half of private companies provide LTIs, with multi-year, cash-based performance awards being the most common vehicles." While use of LTIs is common in private companies, particularly for executives, it remains somewhat rare at NGOs, albeit on the rise – up to 24% prevalence in 2017 versus 16% two years earlier.
Participation in incentive pay programs has also increased regardless of employee classification. The research found that, “at private companies, the prevalence of exempt, salaried employees and nonexempt (salaried or hourly) employees included in AIPs increased in 2017.” However, “the biggest jump occurred for nonexempt employees.” In fact, “about two-thirds of nonexempt employees are eligible for annual incentives, up from half in 2015.”
Likewise, the study indicated that AIP eligibility at NGOs "increased for all organizational levels from manager/supervisor and above." Otherwise, however, "AIP eligibility decreased slightly for exempt employees and remained stable for nonexempt employees."
At the top end of the spectrum, study results show that executives in private for-profit organizations “offer CEOs a median target award of 80% of salary.” In other words, CEOs are incentivized to earn an additional 80% of their base pay value in bonus pay or relative-value compensation. Below the CEO level, this percentage drops significantly. Perhaps not surprisingly, NGOs offer “more modest target awards than for-profit counterparts.” Long-term incentives for executives are roughly equal to annual incentive plans, according to the study.
The research also found that the use of cash-based incentive plans has risen at private companies “because private companies do not have equity that is traded and valued on a stock exchange.” Thus, “cash-based plans are simpler and less expensive to design, operate and administer.” On the flip side, the awarding of real business equity as an incentive dropped since last reported in 2015.
Family-owned businesses, which accounted for nearly one-third of the study sample, largely mirrored other private business entities. One key difference reported in the study findings, however, is that family-owned businesses were more likely to dedicate money toward short-term incentives as a percentage of operating profit rather than long-term incentives: “Family-owned businesses typically provide a pay mix that is heavier on short-term cash compensation” and they “favor performance awards, such as cash plans or performance units, over real equity or phantom equity that requires a company valuation.”
Again, the primary takeaway for private businesses and NGOs is that to remain competitive in a tight labor market and shallow labor pool, incentive plans are essential. Even so, this may only level the playing field; you will still need to find other ways to differentiate your organization if you want to attract, motivate and retain top talent.
Cassandra Faurote is President of Total Reward Solutions.