Do you have a Performance Based Bonus Plan?
Good morning, Ladies and Gentlemen. Welcome to the People Processes podcast where we dive deep into the tools, laws and yes policies and processes that you need to scale and grow your people processes. I’m your host, Rhamy Alejeal and I’m the CEO of People Processes. My company helps organizations all across the USA streamline, optimize, implement, and revolutionize their HR operations. We’ve helped hundreds of companies and thousands of HR leaders across the world get their people processes right.
Today, we’re going to take a look at a new study that’s come out. A survey that says, the pervasive use of short term incentives among private employers is now at 99%. We are talking about what that is, why it’s important and why if you are one of the smaller private companies, you need to be taking a look at it too. Before we go deep, I want to ask you to please subscribe to our podcast. You can find us on iTunes, Google podcast, Spotify, Stitcher, pretty much any podcast or of your choice. You can also subscribe at peopleprocesses.com which will give you exclusive subscriber only content. Okay. Let’s dive right in.
Short term incentives is this, the use of it across almost every larger size private employer shows the desire to reward employee performance and compete for talent in a tight labor market. Even nonprofits and government organizations, 68% of them make use of short-term incentives. These are the two of the primary findings caption. The 2019 incentive pay practices, privately held companies and 2019 incentive pay practices, nonprofit government organizations which were conducted by worldwide work in partnership with compensation advisory partners. These surveys go all the way back to 2007 and have now run every year. Some of the key findings in this report is that spending on STI reflect 6.5% of all operating profit at median up from 6% or down from 6% in 2017 and up from 5% in prior years.
So 6.5% of operating profit at medium, up from 6% in 2017 and 5% in prior years. Got my columns off wrong. Companies are allocating more to reward, attract and retain talent. Let’s talk for a second about what an STI is. A short term incentive. That’s basically a bonus tied very tightly to a specific project, a KPI, a weekly, monthly, quarterly project. It’s not an annual bonus or it may be an annual bonus but it’s not something based on like long-term company profitability like equity. Like large companies a lot of times offer stock options. Those are example of a long-term incentive. Short term incentives are, Hey look, we’ve been this year or this quarter or this month you’ve got this project done, this job, we’re going to do a bonus. And if you look across larger privately held organizations, now 99% some method of that short term incentive and end the nonprofits 68% and small government are using it is blowing me away. Annual incentive plans are the most common type of STI. Those are at 86% compared to spot awards. Project bonuses as firms seem to be consolidating their STI spending unstructure. Structured annual incentive plans that can incorporate company-wide financial metrics and other objectives rather than it being that more project-based. There is an uptake in long-term incentive plan, 62% versus 54% in 2017 which means that they are as a lot more people who are offering equity or profit sharing match over the long-term, those kinds of things.
One of the most compelling takeaways of the 2019 survey is the increased use of LTI plans by private companies said Sue Holloway, CCP CCP director of an executive compensation strategy world at work. She went on to say private companies realize they need this total rewards component to up their game to compete with public companies for top management talent. Regarding the nonprofit sector, three out of four, 76% nonprofits use STIs in some way or another. For these organizations, STI spending is around 2% of operating budget at meeting median. So take all of your operations budget, which a nonprofit is like most of it. 2% of that is going to some sort of a short term incentive. On average, the most common type of STIs are still those AIPs, the annual incentive plans. But, spot award programs are much more common or more prevalent in nonprofits compared to AIPs, in at least compared to private industries with discretionary bonuses, project bonuses, team, small group incentives and profit sharing plans.
Also in the mix, STI plans are being simplified as nonprofits getting used to having these plans as reward tools. The prevalence of organizations using 10 or more performance measurements in their annual incentive plans decreased in 2019 and more. Organizations now report using four to six performance measures. Long-term incentive plans are used by a small minority with only 22% reporting and LTI plan in 2019. A lot of those LTIs are probably for HighQ,. High end executives, right year over year over year growth in your nonprofit, perhaps the, executive director or some of your executives may have some long-term incentives. One of the most interesting trends this year is the decrease in the number of performance measures used by nonprofits, said Bonnie SJ, Lender, principal at CAAP. Four to six performance measurements are now prevalent reflecting a move towards more holistic but manageable incentive management frameworks.
Discretion also continues to play a role in incentive decisions given the difficulty in measuring performance objectively without a true profitability metric. So this survey is very interesting and I just want to kind of hit on a couple of big ideas. If you are a smaller nonprofit or a private company and you’re doing a flat Christmas bonus, everyone gets $50, nothing wrong with that. But short term incentive plans, annual improvement, annual incentive plans are huge and everywhere. They’re a great way to control to incentivize good behavior. In order to do any good performance management, you have to take a holistic approach. You have to know what the objectives key results are you’re trying to accomplish in a year. You have to know what KPIs measurements you can use that are objective to measure the performance of your employees. It’s a big process.
At Academy.peopleprocesses.com we have a week-long deep dive into performance management where we dive in deep on how to structure all of that and bring ideas. Even have templates and that kind of stuff you can use to distribute to your organization. But for those of you who already have one, just keep in mind that the good numbers are 2% of operating budget for nonprofits and 6% of operating profit is going to STIs. So if you take your profit last year, take 6% of that, set it aside. That’s about your short term incentive budget. A 6.5%, actually now in 2020, 19 up from 6% in 2017 and 5% in prior years. So take a look. If you’re looking at your profit and you go, Hey, you know what? I don’t know how much to allocate to bonuses to, to this kind of stuff.
That’s what you want to do, but you don’t want to just do a blanket. Let’s say you had $1 million in profit last year. You want to say, all right, my budget is 65,000, but you don’t want to just spread it out among your employees, not evenly based on their salary. You want to have a plan in place. If you’re thinking about jumping into this, put your plan in place in January or February, run the whole year and do it at the end of your next year or however your fiscal year runs. Nonprofits, like I said, around 2% of operating budget is the most common. Let me know what you think. Speak in the comments message as you can always email us at service,at people processes or find us on Facebook, Twitter, LinkedIn, Instagram, and message me on there. I’d love to hear your thoughts about, does your PR, does your budget reflect a 2% for nonprofits into short term incentives like bonuses. What about your company profit? Are you doing around 6%? Are you doing a lot less? I’d love to see how this applies down into some of our local companies.
In the meantime, take a look at what you’re going to do for 2020. If you’re thinking about pay raises or budgeting for bonuses, lean towards bonuses, this is going to be a great opportunity to truly control. To provide the right incentives for the behavior you want. And this as a manager or an executive going to be one of the biggest bang for your buck in terms of both spend and time spend that you take to put this together. All right. That’s it for today. Ladies and gentlemen, I hope this is helpful. On our website peopleprocesses.com we have all these numbers laid out. Hey, listen this on the podcast. If you want to check us out there, I’d sure appreciate it. Subscribe on there for some special subscriber only content. Follow us on LinkedIn, Twitter, Instagram, Facebook. Love to hear from you on there. Now it’s time for you to go out there, have a great day, and get your work done. Thanks for listening.
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About the author, Rhamy
Rhamy grew up watching and working with his mother and grandmother in the senior insurance market. This familiarity with the struggles faced by people trying to navigate the incredibly complicated and heavily regulated healthcare market led him to start Poplar Financial while working on his degree at the University of Memphis. After completing his MBA and Bachelors in Finance and Economics, Rhamy guided Poplar Financial through the disruptive opportunity that is the Affordable Care Act. Since then Poplar Financial has received numerous awards from major insurance carriers and has completed its fourth year in a row of doubling in size. Now his team focuses on the processes around human resources and specializes in providing companies with between 20 and 1000 employees with the payroll, benefits, and HR needs.