Deciding on your incentive payout cycle : the main points to consider

How to decide your incentive payout cycle

I have delivered quite a few sessions of my Expert Compensation & Benefits training recently. Whether I deliver it in Beirut, Kuwait, Doha, Kuala Lumpur, Namibia, or Morocco, I always make sure to talk about the payout cycle for incentives. Should we pay incentives annually, semi-annually, quarterly, monthly or even weekly ?

A recent exchange with some of my delegates reminded me of an answer I provided on Quora, where I’m listing some of the main things to think about when you decide the payment rhythm for your incentives.

Here it is :

Is there wisdom in paying bonuses annually as opposed to semi-annually or quarterly ? We are considering shifting from quarterly to annual bonus payout. (Relgor on Quora)

This a great but vague question as you don’t describe anything about your current scheme nor the reason you may want to consider the change.

Here’s what to consider when you decide on the payout cycle for your incentives :

Does the incentive payout cycle tie to the business cycle ?

The payment should be as close as possible to the point in time when the triggering event was delivered by the employee.

For example, if your are talking about a sales incentive : is it a short sales cyle (eg : selling cell phones), in which case a monthly or quarterly payout cycle would make sense ? Or is it a long sales cycle (for example : selling complex software solutions), in which case an annual payout cycle may make more sense.

For support functions like Legal, Marketing, Finance or HR, most companies will pay on an annual basis, because objectives and projects are usually delivered over a longer period of time.

Does it make sense from a calculation standpoint ?

For example, if some of the KPIs or objectives take a lot of time for collection and verification, then a short payout cycle may not make sense as it would increase the risk of having to change the payment (up or down) based on final, revised results. So, if your ERP only reports on certain metrics on a quarterly basis, you can’t pay a bonus tied to these objectives on a monthly basis.

Is the amount “worthy” of payment ?

By this, I mean worthy both for the employees and the company.

If the total annual amount of incentive is low compared to the annual base salary, is it really useful to cut it in smaller payouts (quarterly, for example) ? Do you think the payout would be large enough to be perceived positively by your employees (otherwise, you’re spending money for nothing) ?

And, if the amounts are small and touch a vast number of employees, does it make sense to run them multiple times a year as this induces costs for the company preparing and checking the amounts, data input in payroll, checking by finance etc) ?

Why does your company want to change the bonus payout cycle ?

Now, regarding your specific company, you need to question WHY the company is considering changing the payment cycle from quarterly to annual. This will help you decide if the move from quarterly payout to annual makes sense.

This is not about theory, this is about how such a change could impact your organization, beyond a simple change in payment date.

  • Has something changed in the rhythm of business, or is simply for convenience because HR and Finance don’t want to spend time working on these quarterly payments ?
  • Is it because the company is facing financial challenges in terms of cash flow, and if so, is it a permanent or temporary change in payment provision… and also, how will you maintain trust with the employees and guarantee that the company will be able to pay at the end of they year ?
  • Do you have any legal considerations ? For example, does their contract mention a quarterly payment ?
  • Is this something that the employees have requested ?
  • How is it going to impact their cash flow ?
  • How is it going to impact their morale, motivation and engagement or productivity ?
  • What communication will you give to them and who will “own” the decision for the change (I strongly suggest it should come from management not HR) ?

As you can see, there are many things influencing the decision about the incentive payout cycle. It’s not just “a change of date”. It often signifies a change of philosophy around how the organisation pays its employees. You can’t just do it and send an email to inform employees, or you risk having discontent, and then unwanted employee attrition, if you don’t put together a proper plan to handle the situation.

 

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Comments

  1. Sankalp Nanda says:

    In India, especially ITeS industry, incentives are generally paid monthly. We do it basis productivity and it’s generally delayed by a month. for ex- Work done in Feb, gets paid in March salary at the end of March. Very logical article, completely agree with points above.

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