Eliminate Targets from Variable Compensation Plans
Use linear schemes to avoid the hassle of target negotiations and the ill-effects of gaming.
- Organizations that have implemented nonlinear variable compensation plans are vulnerable to employees taking advantage of the scheme through gaming and target negotiations.
- As a result, these plans often cost the organization more than they are worth, leading to underperformance or lost opportunities that affect the organization’s bottom line.
- Developing a nonlinear compensation plan complex enough to eliminate employee manipulation while still ensuring that targets are met and organizational value is created can be extremely difficult and time consuming.
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Our Advice
Critical Insight
- The multitude of fixed targets baked into nonlinear plans incent people to “game the system” to achieve optimum payouts for themselves, regardless of the best course of action for the company.
- To limit this manipulation, organizations should opt for linear variable compensation plans; the absence of rate jump points decreases the incentive to manipulate outcomes.
- Often, organizations with nonlinear plans involve management/executive employees in target setting for their employee group; they are trusted to know when rate jump points are warranted. The problem with this practice is that these employees have a vested interest in the outcome and are therefore inclined to soften targets, causing lengthy debate.
- To eliminate these seemingly endless debates, organizations should opt for a linear plan that eliminates discussions around reasonable rate jump points.
Impact and Result
- Optimized employee motivation. The easier it is for employees to understand a plan and calculate payout, the greater the plan’s motivational effect.
- Reduced administrative burden. The easier it is for plan administrators to calculate payout, the less resource time required to perform calculations.
- Reduced communication requirements. The easier it is for employees to understand a plan, the less time required to explain it – both initially and on an ongoing basis.
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McLean & Company is an HR research and advisory firm providing practical solutions to human resources challenges via executable research, tools, diagnostics, and advisory services that have a clear and measurable impact on your business.
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A blueprint is designed to be a roadmap, containing a methodology and the tools and templates you need to solve your HR problems.
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Get the help you need in this 1-phase advisory process. You'll receive 4 touchpoints with our researchers, all included in your membership.
- Call 1: Make the case for linear plan design
Communicate the benefits of linear plan design with organizational stakeholders: avoid gaming, eliminate time wasted in negotiation, and minimize the administrative burden.
- Call 2: Determine where a linear plan will have the highest impact
Who should be included in the working team for prioritization.
How to identify pain points.Whether your pain points can be addressed by a linear plan.How to prioritize target employees for plan implementation. - Call 3: Draft the linear plan and measure the impact
Who should be included in the working team for plan design.
How to establish your testing scenarios.How to complete the Linear Plan Design Tool.How to conduct a plan design sensitivity analysis.What to include in your linear compensation plan policy - Call 4: Develop an implementation and communication plan
How to use our implementation plan template.
How to establish an effective communication plan.How to keep the plan relevant through ongoing evaluation.
Contributors
- John Bickel, Senior Sales Compensation Consultant at United Healthcare
- David Johnston, President, Sales Research Group
- Jared Oakley, PhD Candidate, University of Memphis