One of the most important functions of HR is to attract and retain productive employees. To succeed, HR must create an effective compensation program that provides fair and equitable pay. Additionally, many organizations establish incentive plans to motivate employees to reach various goals that help grow the business. Well-designed incentive plans have the capacity to promote and recognize exceptional employee performance and elevate employee morale. 

However, it’s important to start first with a competitive salary. According to a survey conducted late last year, 44 percent of small business employees are not satisfied with their pay. Nearly half of those employees indicated that their salary hasn’t kept up with the cost of living. That’s why small businesses should focus on providing workers fair pay through salary benchmarking to ensure compensation levels are both fair and competitive.

Conduct salary benchmarking to set competitive pay scales

A competitive salary means compensation that is comparable to other employers in the market for a similar job in the same industry or location. Competitive pay typically falls within 10 percent above or below the average market value.

In one survey, 65% of respondents indicated that earning a competitive salary helps build loyalty. Given the importance of salary, business owners should keep the following factors top of mind when benchmarking: location, industry, skills, job role, and budget. Once your pay grades are set, your business should also be sure employees know about other aspects of your total compensation package including benefits and workplace culture.

Types of bonuses and incentives

Employee incentive plans work best when the goals are clear, specific, and reachable. The purpose of an incentive is to drive an employee to accomplish a specific achievement—for example, a sales team reaching a financial goal or your customer service team receiving a specific satisfaction score in customer surveys. The reward for this achievement can come in the form of a traditional cash bonus or other nontraditional incentives like extra time off. Here are some other examples:

• Profit sharing plan that offers employees an opportunity to share in your company’s pre-tax profits.

• Retention or anniversary bonuses awarded when an employee stays with your company for a certain amount of time.

• Meals or special events that are given to a team when a specific milestone is hit.

• Non-cash prizes like gym memberships, company swag, or electronics.

Whatever incentive you choose, it’s important to find out what makes your employees happy. Consider sending out a survey to determine what your employees would want as a reward for working harder or achieving better results.

A special note about incentives for sales teams

Another type of monetary reward that is commonly used to motivate sales staff is a sales commission. A sales commission structure defines how much your business will pay an employee for each individual sale. There are several types of sales commission structures to choose from, including a standard base salary plus commission to straight-line, tiered, or territory volume commission plans. Whatever structure you choose, it’s important to make your commission incentive plan clear and simple while allowing your sales team to earn as much as possible for their work.

Incentive plans for sales staff are especially important to get right. As noted by Doug Chung, a sales force compensation researcher in Harvard Business Review, there are benefits to utilizing “a pay system with multiple components—one that’s not overly complicated but has enough elements (such as quarterly performance bonuses and overachievement bonuses) to keep high performers, low performers, and average performers motivated and engaged throughout the year.”

Tips to build effective employee incentive plans

To ensure success, businesses must consider the impacts an incentive program will have on their workforce. Sometimes, instead of motivating employees, certain types of incentive programs can actually have negative effects on performance. One study published by the Human Resource Management Journal found that workers who received performance-based pay worked harder, but also experienced more stress and lower levels of job satisfaction. Your business can avoid these pitfalls by following these best practices:

1. Choose your format. Your business can choose to establish an incentive plan on a one-time basis such as a project-based or spot award or as an ongoing program.

2. Define your plan. To be truly successful, every incentive plan needs to be clearly defined and communicated to employees so everyone knows what to expect including eligibility, goals, rewards, and performance metrics.

3. Give employees meaningful rewards. It doesn’t always have to be about money. A great employee incentive plan can also focus on increasing employee satisfaction by strengthening coworker relationships (special event), improving work-life balance (extra time-off), or building loyalty (profit sharing).

4. Monitor the plan’s results. Many HR experts recommend that businesses check in with employees on a regular basis to see how the plan is working and if the incentives are seen as valuable.

5. Consider legal issues. Employers should also be mindful of any legal issues related to their incentive program and the types of incentives awarded. For example, is the reward deductible to the employer or is the employer required to withhold taxes?

After finalizing comp plans, review payroll compliance

Once you’ve set competitive pay grades and established your incentive plans, be sure you’re getting all the complex moving parts associated with payroll and taxes right. Cloud-based payroll and tax solutions automate everything from wages, benefits, ove
rtime, and garnishments, to direct deposits, FLSA, and tax compliance so you can spend your time growing your business.