Nonprofit Variable Pay

Performance

There are two important steps in establishing a variable pay plan. Defining performance is one of them.

The organization, team, and employee's attention are directed toward accomplishing a particular objective or group of objectives that are important to an organization. The performance goals and objectives should always be attainable and clearly defined to ensure the desired level of performance is attained.

Outcomes

The most common measures of performance, and in many ways the best, are the intended outcomes of the job. In some situations, this can be made an explicitly measurable item such as the number of donations received.

Outcomes can be at a number of levels: individual, team, department, or organization.

Individual. These are outcomes expected for a particular job in the organization. In this situation, each person is measured based on their individual performance. Plans designed for individual jobs are best at making the performance-effort connection; or as it is often termed, the line of sight.

Team or Department (Group). Where it is impossible to relate outcomes to an individual employee's efforts, it may be possible to relate outcomes to the efforts of the team or department. If, in addition, cooperation is required to produce the desired outcome, then a group plan may be the best alternative.

Why choose a group annual incentive plan? Organization-wide annual incentive plans are widely used. When used, top executives desire to reward all eligible participants based on a consistent performance methodology. This also makes it possible to align eligible employees with the short-term goals of the organization and promotes cooperation, teamwork, and coordination of goals and objectives.

Disadvantages of a group annual incentive plan. A group annual incentive plan requires careful design, planning, and communication to ensure a well-executed, attainable plan. If the performance measures are set too high, payouts may not be made and may increase employee relations issues and even turnover. If the performance measures are set too low, inappropriate payouts may take place. An important balance must be made in the design of the plan to ensure fair, appropriate payouts to a motivated eligible group.

If not appropriately managed, the group annual incentive plan can weaken the relationship between the individual's effort and performance. Where there is likely to be wide variation in the efforts of group members, a group incentive may lead to more intra-group conflict than cooperation.

Finally, group norms play an expanded role (both positive and negative) in group plans. They are stronger and have greater influence on the individual. Where group norms are congruent with management's goals, this is a plus; but where the two differ, it can harm the chances of success for the incentive plan.