Six Types of Incentive Plans

Incentives are effective motivators when the objectives to be met are clearly stated upfront and when the incentives offered are desirable. Gone are the days when one type of incentive, such as money or a pat on the back, worked for everyone. A company that provides various types of incentives, tailored to individual workers, motivate employees to consistently do their best.

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The six common types of incentive plan are cash bonuses, profit-share, shares of stock, retention bonuses, training and non-financial recognition.

Giving employees the chance to share in productivity gains or profits, usually through cash or stock bonuses, can motivate them to hit individual benchmarks or help reach team-wide or organizational objectives. One way to offer profit sharing is through deferred compensation. For example, suppose the company already contributes 4 percent of each employee's compensation to a 401(k) retirement plan. The company might establish an incentive plan in which, for every year in which a company's after-tax profits exceed 4 percent, it will contribute to the 401(k) at a percentage that matches its profits. That means that if profits are 6 percent, the company would put 6 percent in the 401(k).

Because these plans are part of a 401(k), the company must meet federal regulatory requirements; however, the advantage is that employees do not pay taxes on the money immediately. A cash profit sharing plan would work similarly, but the employee would receive the contribution in cash or stock. This would be immediately taxable but is subject to less regulation.

One-time bonuses, in addition to regular pay increases or commissions, may be paid to individuals for meeting certain milestones or performing valuable services. One example of this type of incentive plan is offering a cash bonus for referring qualified friends who are hired and complete the probationary period. Other companies might offer bonuses for achieving a specific sales goal or for proposing an idea that saves money. Bonuses also might be offered for extraordinary performance after completion, appraisal and analysis of a specific project. Hilcorp Energy Company promised staff in 2010 that if the company doubled its production rate and reserves by 2015, every employee would get a check for $100,000.

Retention bonuses reward employees for staying with the company for a particular amount of time or through a specific event, such as during a merger or acquisition or a crucial production period. In the case of a merger, the bonus might be paid in full or in installments three months to 18 months after the merger has closed. Almost 60 percent of companies surveyed by World at Work/Deloitte Consulting offer retention bonuses as an incentive for the employee to stay after receiving an offer from a competitor.

Publicly traded companies may offer long-term incentives based on the price of common stock. These incentives help align an employee's long-term financial interest with that of the company. The most popular of these types of incentives for employees is restricted stock, which is given subject to sale restrictions or forfeiture until the employee has been with the company a specific period of time. Also popular are stock options, which allow the employee to buy shares at an agreed-upon price for a certain period of time. Performance shares – grants of actual shares of stock, payment of which is contingent on performance over a multi-year period – are sometimes offered to executives or officers.

Offering specialized training in an area of interest is another valued incentive. The key to making this work is to allow the high-performing individual to choose the type of training they most value. For example, Sammis & Ochoa, LLC, pays for top performers to attend two industry or personal development events within their state.

Many employees thrive on being recognized in front of their peers. One example is an "Employee of the Month" program. The company recognizes the employee through signs in the lobby, emails, a special parking place and at staff meetings and in employee newsletters. Larger companies may choose employees of the month from each division and include breakfast as a group with the CEO. Recognition also can include individual or team perks, such as being able to bring a pet to work or to dress casually for a day, or prizes such as free airplane tickets to a favorite U.S. destination.

As a team incentive, a company might offer a free happy hour or pizza party at a local restaurant of the team's choice. Employees (or teams) might be offered additional vacation or personal time as an incentive to achieve a specific goal. For example, for every quarter that the company has no workplace accidents, workers could receive eight hours off with pay at a time of their choice, with supervisor approval.