I have been building compensation plans for well over 20 years, and in that time I have created virtually every kind of plan imaginable. There seems to be a different plan for every conceivable situation. Here are the different:
BONUS PLANS -- A single payment made at the end of the performance period (typically a year) to reward extraordinary effort or achievement. Although bonuses may or may not be not tied to a specific predefined outcome, the employee does not know in advance how much she will earn if this outcome is achieved. As a result bonuses have limited behavioral or motivational impact. Bonuses are often viewed by employees as gifts and it is not uncommon for them to be paid around holiday season.
COMMISSION PLANS -- Normally associated with sales positions commissions are payouts that occur frequently (usually monthly) to encourage and reward a small number of highly specific results (such as revenues gross margin or units sold). Commission payments are typically based on a specific formula and apply to group of individuals in the same or similar roles. Such plans tend to remain fairly consistent from one year to the next (with minor adjustments as needed).
IINCENTIVE PLANS -- 1) A tangible or intangible reward that is designed to motivate a person or group to behave in a certain way. 2) A single payment made at the end of the performance period (typically a year) to reward specific measurable or observable achievements that have been defined in advance. Incentives differ from bonuses in that incentives define BOTH what needs to be accomplished AND what the employee will receive in return for accomplishing it. As a result incentives have greater behavioral and motivational impact.
PROFIT SHARING PLANS -- A single payment funded by a portion of the company's annual profit paid to an individual or group at the end of the year.
STOCK OPTION PLANS -- Stock options are an employer's promise that the employee may buy at a future date a set number of shares at the price set today.
PHANTOM STOCK PLANS -- Phantom stock is a promise to pay a bonus in the form of the equivalent of either the value of company shares or the increase in that value over a period of time.
STOCK (or EQUITY) APPRECIATION PLANS (SARs)-- A stock appreciation plan is much like phantom stock, except it provides the right to the monetary equivalent of the increase in the value of a specified number of shares over a specified period of time.
GAINSHARING PLANS -- A plan that pays individuals or groups a share of expense savings attributable to the efforts of that individual or group.
KEY CONTRIBUTOR PLANS -- Plans that are designed to retain and motivate a select group of key individuals who are critical to the success of a particular project or the company as a whole.
SPIFFS -- A small, immediate bonus typically paid by a manufacturer or employer directly to a salesperson for selling a specific product during a relatively short time period.
MULTI-YEAR INCENTIVE PLANS -- Plans that measure and pay for performance over a timeframe longer than a single year. Sometimes referred to as Long-Term Incentives (LTI).
MERIT INCREASE PLANS -- Plans that determine the amount of a person's base salary increase based on other people's (typically the manager's) perception of the value of an individual's performance.
360 DEGREE REVIEW PLANS -- Plans that determine the amount of a person's base salary increase based on the perception of individuals at all levels (peers, subordinates, and managers) of the value of the individual's performance.
PERFORMANCE MANAGEMENT PLANS -- Plans that determine the amount of a person's base salary increase based on specific criteria that are defined in advance and communicated to the employee.
COMPETENCY-BASED PLANS -- Plans that determine the amount of a person's base salary increase based on the acquisition of specific competencies (i.e., knowledge, skills or abilities).
TAX DEFERRED PLANS -- Plans that structure payouts in ways that minimize the short-term tax obligation of the recipient by either deferring payout until a later date or placing the payout in tax deferred investment vehicles.
Why so many different plans. Can it possibly be that difficult to motivate people? It's kind of scary to think what might happen if you pick the wrong type. The good news about these plans is that they work. And the bad news is that they work. Pick the wrong one (or set it up poorly), and you may not get exactly what you bargained for. In upcoming entries, I will discuss when it is appropriate to use each of these different types of plans.