Incentives Compensation can Drivers in attracting the best Employees
Incentives are variable rewards granted to employees as per the variations in their performance. To succeed, an organization must attract and retain productive employees.
Compensation can be divided into salary, benefits, and incentives. While salary and benefits must be competitive, incentives are the most likely drivers of attracting and retaining the best employees in startups. There are three key types of incentives: bonuses, profit sharing, and stock options.
Bonuses
- Individuals are rewarded based on attainment of performance-based goals (individual, team and/or company).
- Goals must be realistic and closely matched to the business and people involved.
- Payout potential should be large enough to be significant to the individual.
- Bonuses can be set up to directly drive and support the company’s needs (for example, profitability, annual results, successful completion of projects and/or significant project milestones).
Profit sharing
- Payment is tied to company profits.
- A pre-determined percentage of profit is shared among all employees.
- Profit-sharing bonuses are generally paid out once a year in the form of cash or on a deferred basis.
Stock options
- An individual receives the option to buy company shares for a set price during a specified time frame.
- An option can be exercised by the individual at any time during the agreed-upon term and subject to any vesting schedule.
- Stock options are often part of management’s executive compensation but may be offered to key employees in lieu of a higher salary—especially where the business is not yet profitable and/or cash flow is constrained.
- If the business does well and the company’s stock rises, the holders of the options share in the financial benefits.
- In general, if the company permits a long period from the date of issue to the last date for exercising the option, it will encourage the employee to stay with the company and be fully committed to its success.
Commissions
Commissions are a common way to remunerate employees (salespeople) for securing the sale of a product or service. The intent is to create a strong incentive for the individual to invest the maximum effort into their work. Commissions are usually calculated as a percentage of the sale of the product or service (for example, 5% of a computer component’s retail selling price).
Payment may be either straight commission (no base salary) or a combination of base salary and commission. In general, the commission structure is based on reaching specific targets or quotas that have been previously agreed upon by management and the employee. These targets or quotas are typically tied to sales revenue, unit sales or some other volume-based metric.
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