We discuss here the reason why an incentive plan for your employees may make sense. Let's start with the process of crafting the incentive plan.
Essentially, there are four primary design options available for your incentive plan. Let's delve into each of them and discuss their respective pros and cons to help you make an informed decision.
1. Profit-Based Design: This approach revolves around establishing a profit trigger. It is a straightforward method that focuses on the bottom-line profit of your business. Once the company reaches the specified trigger, the incentive plan comes into effect. For example, if the trigger is set at $2,000,000 and the shared percentage is 10%, then 10% of all profits above $2,000,000 are allocated to the incentive pool.
👍Pros: This design aligns employee incentives with the overall success of the business, encouraging them to contribute towards increasing profits.
👎Cons: It may not be suitable if you are hesitant to share your net profit figures. Additionally, if your business experiences inconsistent annual profitability, this design may not be the most effective choice.
2. Modified Profit-Based Design: This approach builds upon the profit-based design, but with a modification. Instead of solely relying on the net profit stated in the income statement, a pre-determined agreed-upon number for overhead can be taken into account.
👍Pros: By considering overhead costs, this design provides a more accurate representation of the company's profitability and ensures a fair distribution of incentives.
👎Cons: Similar to the profit-based design, it may not be suitable if you are reluctant to disclose your net profit figures.
3. Profit Pail-Based Design: This design is similar to the profit-based approach but is typically employed when a business's profitability does not follow a consistent annual pattern.
4. Top Line Trigger-Based Design: In this design, the trigger is usually a fixed dollar amount derived from revenue/gross sales or gross profits. This strategy makes sense in the following circumstances:
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You're reluctant to share your net profit figures.
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Your business is consistently profitable.
- Your employees don't have control over pricing.
While this plan isn't directly linked to the company's net profits, it should still include a profitability target for effective implementation.
👍Pros: By using a top-line design, you can focus on the company's revenue or gross profit, providing a clear goal for employees to strive towards.
👎Cons: If your goal is to motivate your key employees in every respect of your business, you want them to be part of everything and not just on top-line revenue.
Now that you have chosen the right design for your company, it is time to move to step 2, which is implementing the plan.
