Basics of Total Rewards

Short-Term Incentive Plans

Short-term incentive plans are cash awards to recognize individual, team, and/or company performance and may be paid at any time after the close of a one-year or less performance period such as one-time, quarterly, semi-annually, or annually. Variable cash plans may be discretionary or nondiscretionary awards.

The following short-term incentive plans are most frequently used today:

• Annual incentive plan (most widely used)
• Spot cash award
• Retention bonus plan
• Discretionary bonus plan
• Project bonus plan
• Profit sharing plan
• Team incentives
• Gainsharing plans

• Annual Incentive Plan: A plan designed to recognize and reward the achievement of special individual, team, and/or company results. Award targets and methodology for payment are commonly established prior to the beginning of the performance cycle, in contrast to bonuses. Most annual incentive plans are non-discretionary plans.
• Spot Cash Awards: Awards recognizing special contributions as they occur for a specific project or task. Spot awards usually are for a special contribution accomplished over a relatively short-term period.
• Retention Bonus Plan: A retention bonus plan is typically used to recognize and reward a key employee or team to achieve a set of objectives over a critical period of time. It is commonly used in the event of a crucial business event (e.g., acquisition or business shut down).
• Discretionary Bonus Plan: A plan with no predetermined formulas or commitments and with no guarantee for payment. After a performance period, top management will determine the size of the bonus pool and the amounts to be paid to specific individuals.
• Project Bonus: A bonus paid to an employee or department as a reward for achieving a special project over a specific period of time.
• Team Incentives: An incentive plan designed to recognize the performance and/or objectives of a team or small group. Measurable output is commonly recognized based on the team’s combined efforts.
• Gainsharing Plans: An incentive plan designed to share the results of productivity gains with employees as a group.

In new-economy organizations:

• Incentive plan participation goes deeper into the organization and is more widespread than in organizations of the previous century. This allows companies to contain costs during challenging times and share in the rewards during favorable times. This reflects the philosophies of shared risk taking and employee engagement.
• Short-term Incentive plans are not "guaranteed." In traditional organizations, managers were guaranteed their bonuses, regardless of performance, and they became entitlements.
• Incentive plans are more likely to be based on performance results, not performance appraisals.
• Short-term incentive plans are commonly used and often spread throughout an organization to levels of employees that did not receive annual incentive awards in traditional companies. For example, an annual incentive plan may include an eligibility group from entry-level employees to top executives.
• Maximum annual incentive plan payouts are frequently designed to pay top producers at up to 150% to 200% of the targeted incentive.
• Team, group, and total-cash profit-sharing plans are now more common than the pension plans of the previous century. Few businesses still utilize pension plans as their primary means of retention in the private sector.