Now that we have a set of goals for all of your direct reports whose goals are directly in support of your goals, it is a matter of monitoring the progress being made each quarter with everyone. Remember, if someone doesn’t achieve their goals, it could mean that you don’t achieve one or more of your goals.
Next we want to incorporate those goals into a formal incentive plan to incentivize and reward your employees for having achieved them.
First, we weight each of the goals according to their relative impact on the success of the organization. You would probably weight a goal of hitting a sales target higher than you would a goal of furthering their education. So the various goals’ weightings will total 100%.
During the review process, and more formally at the end of the year, you will assign a grade for the successful achievement or lack thereof. This grading can range from zero to 100%, depending on how well the individual did on achieving each goal. In my case, I used a range of zero to 120% to allow for a higher reward for someone who has exceeded a goal. For example, if a sales goal was $100,000 and that person brought in $150,000, I could reward that person with a score of up to 120%.
To have an incentive system you need to set target rewards for each person in the incentive plan. Research has shown that you should at least have a target award of 20% of the base compensation or more. The idea is that 20% or more is enough of an incentive to change behavior and properly provide the motivation necessary to accomplish goals. The award set will also align with each individual’s total compensation target. In other words, if a person’s total target comp is $60,000 and their base comp is $40,000, you might have a target incentive of 50% of base pay.
At the end of the year you review each goal with the individual, and after a discussion, assign a score to each weighted goal. So, to do the math using the above example, let’s assume the person exceeded their first goal which was weighted at 20% (of 100%). You decide to assign a score of 110 since they exceeded that goal. Using the example above, for the first goal they would have earned 22% (20% x 110) of their total target incentive of 50% of $40,000. Doing the math, they would have earned a $4,400 award for exceeding their first goal. (50% x $40,000 = $20,000 total target) $20,000 x 22% = $4,400 for the first goal.
You continue this process for the remaining goals and arrive at a total incentive award for the individual for the year.
There are many variations on all of this, but this is the basic structure of how an effective incentive system can work.