What is Management Incentive Plan? A Key Pay Equity Tool
With managers receiving a median yearly pay of $116,000, rewarding them for performing above and beyond might seem unfair to some. But at the end of the day, management is still a small group of employees – and rewarding them when they’ve done a good job is the key
That’s why if you want to reward the upper rung of your company’s management for a job well done, then having a solid management incentive plan is the way to go.
So read on to learn more about it, what it is, how to write one for your business, and how it’s an important pay equity tool.
What is a management incentive plan?
A management incentive plan is a compensation program that provides upper management with bonuses upon hitting certain milestones. Whether it’s strategic, metric, or sales goals, implementing the system offers to reward them for leading the people under them effectively and ensuring financial performance for the business.
A properly designed incentive strategy ensures two things: efficiency and talent attraction. Not only does having access to an effective incentive strategy promote productivity and a positive workforce environment focusing on desired behaviors, but the management team will also need to promote a more efficient workflow to make sure that both them and their employees get the incentive.
Top talents are also more likely to apply to your company since they’re aware that the payment they’ll receive will be equivalent to the benefits that they can bring to the company upon reaching performance goals.
Management incentive plan examples
Rewarding the management team shouldn’t just follow similar formulas – instead, implementing both new and tried-and-tested incentive strategies other than employee input or offering share prices can motivate both the managers and their employees.
Referral bonuses
Although referral bonuses as a compensation strategy aren't exactly revolutionary, their effectiveness speaks for itself. After all, Forbes once said referrals are the “holy grail of hiring” and many employers have used referrals are using it to great success.
Research has shown that not only are 74% of referrals made for management positions, 33% are high-quality candidates versus ones made online. It’s a win-win situation for both the employees and the employer, as the employee can get their referral bonus, and the employee can easily acquire top talent for the position,
Typically, employers can award somewhere between $1000 to $3000 in cash as a base rate for their referral bonus, but it can vary depending on the position. Referral bonuses upon the new hire's good personal performance is also a thing, especially since it offers compensation to both the current and the new employee for a job well done.
Wellness initiatives
With 51% of America’s upper management taking less time off than they’re supposed to, using a wellness initiative as an incentive becomes more valuable as time goes on.
Incentivizing wellness programs like taking stress management courses, encouraging PTOs, and fitness programs over individual performance-based incentives can help promote mental well-being.
For example, Johnson & Johnson employees saved over $250 million in healthcare from 2002 to 2008 after they implemented a wellness initiative incentive program. Not only that, but smokers within the company are reduced by two-thirds, and cases of high blood pressure and physical inactivity are cut in half as well.
Profit-sharing
Profit-sharing refers to the system of allocating a portion of a company’s profits to their managers. Think of it as a 401k, but the company instead makes the contributions to your retirement fund instead of being taken from your salary. This also means that, if given the chance, an employee can also invest their profit share in private equity.
Think of profit sharing as performance vesting, since instead of providing short term incentive plans, it aims for the bigger picture instead. This makes it ideal for top executives and various stakeholders as it's a long-term incentive plan where the time frame isn't that much of a problem.
Offering stock options as an incentive plan also aims to alleviate pay gaps in the long run. This is because the amount contributed to the profit share goes up and down for every employee, and there are no differences between merit or performance. The profit share isn't taxed when added to an account, but it will be taxed when it's withdrawn afterwards.
How does a good management incentive plan help with pay equity?
Providing managers with compensation for a job well done can help them not only develop a better working system for both them and their employees but also help smoothen financial performance and the company’s success.
Think of it as a domino effect – management is focused on streamlining processes and efficiency while valuing company values. This can help produce happy, efficient, and top employees who can either reach their quota or go above and beyond to reach their incentive plan, which can then result in the company growing further.
That said though, providing management incentive program can only help bridge pay equity gaps temporarily. Hiring a consultant to help with remediation can make a more permanent change and help with a more solid compensation philosophy that suits your company the best.
How to write a management incentive plan
Creating a management incentive program for your company’s management need not to be as complicated as it seems.
Before writing one though, think about the following questions first:
What’s the end game? What is the incentive program’s final goal, and what are the incentives you will be giving your employees?
What is the goal? Is it to promote a healthier working environment, or is it to promote a healthier working environment, or is it to hire new talents?
Upon determining that, create an outline for your management incentive strategy, which can be broken down into three steps.
What kind of incentive program are you going to give out? Will it be one of the aforementioned ones above, or will it be more performance-based? Will it be through cash bonuses, via employee benefit trusts, or other compensation packages?
What are the metrics involved, and who will be eligible to receive them? Who are eligible, and what KPIs are needed to receive the incentive? Also remember to keep objective measures in check, and consider the regulatory considerations.
When will the program be implemented? Will the incentive program kick in during the peak season, or will it be active all year long?
And lastly, what can be done to streamline the process further? When it comes to business, everything can be streamlined further for maximum efficiency. Thus, always look at the metrics and ask: what can be done to make this process more efficient?
Keep in mind though – if made even a bit wrong, a management incentive plan can completely backfire and mess up your company’s overall pay equity. Luckily, there are tools that you can use to manage your pay equity further.
FAQs
Here are some common questions about management incentive plan:
What is the advantage of having a management incentive plan?
Incentivizing management can not only motivate management to create better workflow processes, but it can also provide better employee retention and a friendlier work environment, which can result in improved company culture. Companies implementing an effective incentive strategy also see a 20 to 30% increase in employee engagement as well.
How can one prepare a good incentive management plan?
The key to creating a good incentive plan is to be aware of your company’s needs and leverage the incentive system to your advantage. The aforementioned outlines are a good starting point. For a better incentive strategy, consider seeking additional insights to improve your approach
What is the most common incentive plan?
The most common incentive strategy is the performance-based bonus, where incentives are given out upon reaching, or exceeding certain metrics.
Is management incentive plan the same as a performance incentive plan?
Yes, but with certain differences. Performance incentive plans can apply to both the management and the lower rung of the company structure, whereas the latter is exclusive to managers.
