African-American businesswoman standing with arms crossed while others walk by.

How do you know your employee incentive scheme is working?

So your organisation is one of those with an incentive scheme, which is designed to drive high performance and align the interest of employees with those of shareholders!

Well, what makes you so sure that your incentive scheme is generating significant value for the regular payouts that your employees receive from it? Have you carried out an assessment of the effectiveness of the scheme in terms of its ability to drive performance, the desired behaviour and achievement of corporate objectives?

In a recent survey KPMG conducted on reward practices involving 120 companies in Nigeria, about 80% are operating incentive schemes. However, the question is whether they carry out a periodic assessment of the effectiveness of such schemes. In the 2015 edition of the KPMG Consumer Market Remuneration Survey, we noted about 17% increase in payouts from incentive schemes even when there was significant contraction in profits. This suggests that there is no alignment between the payout from the incentive schemes and corporate results. This may be due to the use of the wrong performance measures or a fundamental defect in the design of the scheme.

In an economic crisis, employers should focus on enhancing efficiency and optimal use of resources. They, therefore, need to review their reward systems, particularly incentive schemes, to ensure that they are effective in driving achievement of agreed objectives in the most cost-efficient manner. In a WorldatWork1 survey amongst compensation professionals, 70% of the respondents were of the opinion that incentive pay is “important or very important” to the success of their organization. Therefore, the need for an effective incentive scheme to curb guaranteed entitlement culture has become more critical in the current tough operating environment.

Why incentive schemes do not deliver the desired results

Beyond implementing an incentive scheme, every organisation must ensure that the scheme is properly designed to drive optimal results. Generally, as part of the life cycle of every reward model, a critical evaluation is required periodically to measure effectiveness and value-add in achieving the objectives of setting up the model. The business needs to know how the incentive scheme is impacting results, if at all it is. If an organization has never evaluated its scheme, it can never be too sure what impact the scheme is having on its people and performance. Every company should therefore review its incentive scheme and make necessary adjustments to enhance effectiveness in achieving the defined objectives.

Conclusion

In conclusion, it is not sufficient for companies to operate incentive schemes. They also need to carry out periodic assessment of their effectiveness in achieving the desired objectives. With a proper review, an organization could save significant cost, by ensuring that only deserving performance results are recognised and rewarded. Businesses must ensure that the right measures and performance levels are being set. The scheme structure must be flexible such that it changes as the business focus changes, for it to remain relevant and aligned. Given the heightened focus on ensuring optimal deployment of resources, organisations should move away from guaranteed payments, and shift to incentive schemes that align with shareholders’ interest.

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Contact

Adewale Ajayi

 

 

 

 

 

 

Adewale Ajayi
Partner, Tax, Regulatory & People Services
T: +234 803 402 1014
E: adewale.ajayi@ng.kpmg.com

About Femi Oke

Relentless passion for creativity and digital acumen to help a professional services firm thrive in the digital space. Femi is an individual with a rich experience on regional African knowledge, its diverse business culture and he understands the continent’s economic drive. He thrives on selfless service and lasting mutually beneficial relationships with colleagues and especially clients encountered in the course of his duties. He is creative, practical and self-motivated with business judgement in corporate, brand and strategic communications, social, digital & traditional media and executive profiling. Roles in the firm include New Media, Digital Communication, Corporate Communication, executive profiling and Brand Management execution. Working on the multi-million dollar Africa high growth market project stands out for femi; besides this, managing all KPMG’s digital communication for the World Economic Forum on Africa is another project that gives him great delight. Femi holds a Masters Degree in Global Marketing from the University of Liverpool.

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