Designing Staff Incentive Schemes (Briefing Note)

This paper has been designed as a briefing note that lays out principles and steps for designing effective staff incentive schemes. The author begins by highlighting two important aspects of any incentive scheme:

• Transparency: It refers to mechanics of calculation, objectivity and rules that should be conveyed to all and not changed arbitrarily;
• Fairness: The goals should be attainable, rewards should be in accordance with the performances and participation should be by everyone.

The author then mentions some critical design issues:

• Timing: Incentive should be applicable to those who have at least six months' on the job experience;
• Frequency of payout: Frequency should be such that incentives are not construed as an entitlement; annual or half yearly payments should be avoided;
• Percentage of incentive to total remuneration: Incentives should ideally range from 20% to 50% of the salary.

The author describes various types of schemes:

• Individual incentive schemes: Direct link between individual performance and remuneration;
• Team-based incentive: Often used for branch-based activity. Employee stock ownership plans: Typically a one time incentive mechanism;
• Profit sharing: A good way to reduce gap between management and employees, not always suitable to reward individual performers;
• Delayed benefits: Helps reduce turnover in long run.

The author defines steps to designing an effective staff incentive scheme such as:

• Analysis of culture, clientele etc.;
• Objective of scheme;
• Choice of mechanism;
• Pilot test.

The author concludes by stating that incentive schemes ought to be tailor made and cannot compensate for flawed products or procedures.