Group Incentive Plans and Long-Term Incentives Essay Example

Paper Type:  Essay
Pages:  5
Wordcount:  1117 Words
Date:  2022-10-25

A company should have the capacity to retain and attract productive employees as a strategy to enhance its overall success, and this calls for the need for the organization to develop competitive incentive plans to attain these objectives. Incentive programs are formal schemes or methods employed to encourage or promote specific behavior or actions by a particular group of individuals during a stipulated period (Biswas, 2013). An organization's business management and marketing approaches may adopt the use of incentive programs to motivate employees and to retain and attract consumers. A company's employee incentive plans often aim to enhance the overall performance of employees. Employee incentive programs play a significant role in minimizing employee turnover rates, improve employee loyalty and morale, increase employee retention rates, improve employee performance, and enhance employee wellness. The effectiveness of an organization's incentive plans is dependent upon its capacity to meet its established goals.

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Short-term incentive programs often present one with a competitive total compensation package required to attract new employees and enhance the rates of employee motivation and retention. A short-term incentive compensation program is a formula-driven plan designed to recognize an employee's accomplishment of specific outcomes (Durai, 2010). Short-term incentive programs usually focus on creating incentives aimed at motivating employees to attain particular goals within a short period, typically a year. Under this plan, rewards are typically tied to the identified desired outcomes at the beginning of an organization's performance cycle. Short-term incentive programs may be companywide, group, individual, or a combination. Various factors should be considered during the designing of short-term incentive plans. One ought to ascertain the purpose of the incentive plan to stipulate the organization's targeted behaviors and results and to enhance the development of measures and objectives aimed at achieving success. The purpose should be communicated effectively to employees to improve their understanding on the need to attain these specific goals and the promising rewards following the achievement of the set goals. Secondly, the organization ought to determine the participants in the plan and develop eligibility guidelines; this factor enhances the employer's capacity to understand his company's populace and areas that would benefit significantly from the short-term incentive plans. Thirdly, one should select measurable and meaningful metrics that will enhance successful incentive plans, for instance, earnings per share, net income, annual sales, or revenue growth (Durai, 2010). The parameters should also be administered and communicated in an efficient and timely manner.

Fourthly, one needs to determine the structure of the incentive plan. The structure of the incentive plan involves the establishment of goals which delineates the objectives that ought to be accomplished, the development of the awards criteria (maximum and minimum threshold limit), and the development of parameters that describe the measurement and compensation strategies (Ellig, 2014). One should also determine the cap of the structure. The structure should be flexible and linked to the sales cycles to ensure that one has access to the primary data required to ascertain the incentive payout rewards. The fifth factor is the implementation of the incentive plan; this involves communicating the program to employees and designating a project manager to oversee and facilitate the process. Sixthly, one needs to develop an effective administration process. The administrators of the plans ought to ensure the effective implementation of the established procedures and policies, and monitor the progress of the plan and payout process to ensure that they are done promptly. Lastly, one should incorporate an evaluation approach in the incentive plan (Ellig, 2014). The evaluation of the program will foster the effective attainment of the plan's objectives by employees and their respective leaders. An evaluation plan may also help one decide on the efficacy of the plan's ROI.

Long-term incentive programs develop an alignment amid managers and owners by presenting leveraging recognitions for managers based on the value of the organization. Long-term incentive programs have three crucial factors: The analysis of the measures of performance based on the company's financial value, alignment of rewards (recognition) with achievements and value with leverages, and timeframe (Biswas, 2013). Aligning the benefits approach with the objectives of a business often allows an employer to revisit the approach frequently to ensure it changes according to the employee change requirements and regulations while still promoting the priorities of the business. Employers should always aim for international consistency, increase employee options, offer core security benefits, educate employees regarding the incentive program, and offer high performing incentive programs. Secondly, the organization should employ the use of qualitative and quantitative assessment metrics to identify the risks associated with the plan and the impacts brought about by the risks respectively. Stress testing may be employed during the quantification of the incentive risks as it allows organizations to evaluate the effectiveness of the incentive plan in meeting its objectives with regards to employee performance. The analysis of performance measures ought to be based on the organization's financial value. Lastly, one should determine the incentive plan's timeframe. Long-term incentive programs often have a performance measurement period of around three years and above and are usually offered to select top administrators whose actions and decisions impact the entire organization's success and performance directly (Ellig, 2014).

Long-term investment plans have various advantages. LTI programs often focus on the organization's performance horizons in the long-run by ensuring alignment with the interests of shareholders. Secondly, they enhance the organization's capacity to offer awards based on the creation of real value. Executives are usually rewarded according to their ability to attain the organization's strategic goals which subsequently maximizes shareholder value (Durai, 2010). LTI plans may assume a variety of forms, for instance, stock-based compensations such as performance shares, restricted stock, or stock options. Thirdly, long-term incentive plans enhance group performance, and it counterbalances a company's short-term decision-making procedure. Some of the disadvantages associated with LTI include the fact that it is time-consuming, has significant complexities which subsequently leads to lack of understanding and the fact that its establishment is significantly difficult (Ellig, 2014). Outside factors may also impact performance indirectly. One primary advantage associated with short-term incentive plans involves their capacity to align compensation with profits. Secondly, short-term incentive programs provide employees with an opportunity to share in the success of the business (Ellig, 2014). Thirdly, these forms of incentive plans often focus on stipulated outcomes, and they usually encourage performance improvement. Some of the disadvantages associated with this incentive plan are that it restricts the capacity of employees to take risks, may impact workplace teamwork negatively, and it encourages temporary compliance.


Biswas, B. (2013). Compensation and benefit design: Applying finance and accounting principles to global human resource management systems. Upper Saddle River, N.J: FT Press

Durai, P. (2010). Human resource management. Chennai: Pearson: Dorling Kindersley.

Ellig, B. R. (2014). The complete guide to executive compensation. New York: McGraw-Hill Education.

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