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

https://youtu.be/m2Lqar6uStc

SUMMARY

  • “Deciding on an incentive payout cycle has many components. It’s not just a change of date of payment”.
  • Are you considering changing how frequently your company pays out incentives ? In this episode, discover all the elements to consider before making the decision.
  • A change of incentive payment date has impacts on your organization, beyond the simple change in date.
  • Watch the video to get the full training, or read the transcript below.

INSPIRATIONAL QUOTES


TRANSCRIPT

Editor’s note : As I recently had the same question asked to me a few times, I have decided to do a video and update a previous post addressing the topic. Here it is :

Hello and welcome to this episode of Compensation Insider. Today, I’d like to take you through a question that I received from one of my readers a few years ago. I will share with you the advice that I gave to him. So his name is Relgor, and his question was :

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)

That’s all I received as a question. Obviously it’s a little bit vague because he doesn’t describe anything about his current scheme nor the reason why he may want to consider the change.

But generally speaking, 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 ?

If some of the KPIs or the objectives take a lot of time for collection and verification, then a short payout cycle will not necessarily make sense because it might increase the risk of having to change the payment up or down based on the finalised results.

If your ERP only reports on certain metrics on a quarterly basis, you can’t pay a bonus tied to those objectives on a monthly basis, because you will not have relevant performance information to calculate the amount to pay.

In short, just the technical aspects of the calculation and the data availability is going to drive part of the answer to the payout cycle.

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) ?

If you think that the payout would be large enough to be perceived positively by the employees, then you should consider potentially paying them on a more frequent basis

If the amounts are small and they touch a vast number of your employees, does it make sense to run them multiple times a year? Because it creates cost for the company : preparing, checking the amounts, the data input in the payroll, the checking with Finance, the time that HR is going to spend on that and so on.

So, really think of those three aspects. Does the time when you want to pay, the frequency tied to the business cycle, does it make sense? Can you calculate it properly and is the amount worthy of a payment?

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, let’ say, 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. If you don’t put together a proper plan to handle the change, you risk discontent and then unwanted employee attrition. Whichever way you decide to go, you need to be ready to explain it and communicate it in a proper manner.

I hope you found this useful. If you have ever changed the rhythm at which you were paying out on some incentives, and you have some stories that you would like to share, please don’t hesitate, leave a comment and share your story with everyone. Thank you very much and see you next week.

Related posts :

https://youtu.be/m2Lqar6uStc
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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.

  2. Muhammad Usman says

    In addition to what you described above I would like to highlight the difference between incentive an bonus so that we don;t mix things up (From a technical point of view ). Incentive is forward looking and more certain (i.e. if you do this, you get this x amount) to achieve immediate results and for continuous motivational push hence they are to be paid on shorter cycle i.e. monthly to quarterly. On the other hand, bonus is backward looking and some times uncertain due to performance of company (i.e. what have you achieved and how much you be paid). Keeping that in mind you can decide which variable compensation schemes you would like to classify as incentive or bonus. The next question of payout cycle which needs to be match with your sales cycle and pay mix. For example, you will not find 0(fixed)/100%(variable) pay mix with annual incentive payout because it would be impractical and inhumane and such schemes are practiced by employers who are selling short cycle products. Where sales cycle from opportunity identification to contract signing takes more than weeks or months then quarterly payout would suffice with a clause to have a claw-back on annual review time. In call centers you will find monthly payout cycle because they close deals over the phone in 10 to 15 minutes but this can be further brought down to weekly basis as well as long as the cash flows and extra administrative burden can be absorbed. So at the end of the there are multiple factors that are in play here.

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