The Ultimate Guide To Employee Engagement: Incentives, Metrics, And Why Your HR Needs This NOW!

How smart incentives transform your workforce

According to a 2022 Gallup survey of American workers [1], employee engagement declined over the last several years. Disengagement can manifest in the form of decreased productivity, collaboration, and retainment, any of which could affect an organization negatively. Given this, it is sensible to consider implementing initiatives that directly target employee engagement. Aligning employee goals with organizational objectives is a balancing act, and this article weighs the modes, methods, and merits of using incentive compensation to encourage employee engagement, delving into the following: 
 

• Incentive types 
• Influence on employee engagement 
• Aligning incentive programs with metrics and engagement efforts
• Plans design and implementation 

Incentive Types

Incentives can take various forms of financial and non-financial components, enhancing the overall rewards package. 

Cash incentives are typically the most common and effective type of incentive offered by organizations that lead to improvement in employee engagement and performance [2]. Monetary incentives can include cash items, such as bonuses, profit-sharing, merit pay, and stock.

Bonus compensation is one of the most common forms of cash incentives, reflecting variable cash typically paid to an employee for achieving performance goals. They provide a direct financial reward, taking various forms, such as holiday, performance, sign-on, and retention bonuses. 

Profit-sharing is another common bonus linked to an organization's success. Profit-sharing programs distribute part of the company's profits among employees, fostering a sense of shared responsibility. It is reasonable to offer profit sharing, particularly to senior management, as they typically have a direct impact on the overall performance of the organization.

Merit increases are salary raises based on employee performance. Although merit increases help provide financial security and stability to employees, they may not offer as much motivation for future achievements as effectively as additional bonuses or other variable cash incentives.

Although there are many other incentive types, including even non-cash incentives, the above incentive types are particularly motivating, with market data readily available for these incentive types.

Compensation Incentives for Engagement

The Human Resources department often takes the frontline position in addressing low employee engagement. This section outlines the process of incorporating incentives into compensation planning, emphasizing steps, practices, and challenges. 

Compensation Incentive Planning Process Steps

Incentive compensation planning begins with an analysis phase in which the organizational goals, budget, and performance metrics are determined. Evaluate past employee performance, current incentive structure trends, and incentive market salary data. Incentives should be woven into the larger tapestry of total rewards management by understanding workforce dynamics to enable the creation of incentive programs that resonate with employees – both current and future. 

Once the assessment and analysis phase is complete, the focus shifts to the design phase. Select incentive structures tailored to the organization, deciding what kinds of incentives to offer and the amount. Also, define eligibility criteria and consider pertinent factors, such as internal job roles and performance levels. For example, some organizations base incentive criteria on a point system in which employees earn points based on specific criteria, and the point tiers have defined payout amounts. Setting performance levels and resulting salary increases (usually a percentage) becomes a key step, as these benchmarks determine the success of the incentive programs. 

HR professionals oversee the rollout during the implementation phase. Continuous tracking gives insights into the effectiveness of the programs, allowing for adjustments. HR professionals can conduct analyses on the impact of incentive programs by looking at compensation metrics and summary reports, as well as conducting employee surveys to gather feedback. 

Considerations and Recommendations

Organizational goals may shift over time, so HR professionals should design incentive programs to be flexible to allow for modifications. This adaptability ensures that incentive structures stay relevant and supportive of evolving business strategies. If there is a case where an organization can no longer provide an incentive that employees were able to earn, this could lead to employee mistrust and disengagement. Incentive types and their amounts must be chosen carefully, allowing the organization to sustain offering the incentive.

The organization's budget is a primary consideration, guiding decisions on the financial resources available for incentives. 

Aligning with the market is imperative for maintaining competitiveness, and incentive benchmarks and industry standards serve as reference points to ensure that salaries and bonuses are still attractive. Both company and employee performance are influencing factors in the size of merit increases and cash incentives, with high-performing individuals and teams often receiving larger rewards and low-performing individuals and teams receiving few or sometimes no incentives or merit pay. 

While compensation incentives are powerful motivators, there can be unintended consequences. For example, an exclusive focus on individual performance incentives may inadvertently foster competition at the expense of collaboration. Carefully consider potential drawbacks and implement measures to reduce them – in the case of this example, one might incorporate department-based incentives, promoting a balanced approach to performance evaluation.

Applying the Concepts

HR professionals should leverage data analytics tools to track the impact of incentives. A data-driven approach provides valuable insights into compensation planning and continuous improvement of employee engagement. 

Merit Increase Planning

Find a merit increase tool that enables the ability to define and plan merit increases for employees based on performance levels. Additionally, consider metrics such as an employee’s compa ratio and the market index to align salary increases with market averages.

Designing a merit increase plan based on compa ratios involves assessing how an employee's current base pay compares to the midpoint of their pay grade. For example, a compa ratio of 1.0 indicates that the employee's salary is at the midpoint and may not need an increase as urgently as an employee that has a compa ratio below 1.0. Figure out where your employee’s compa ratio sits, allowing you to consider potential salary inequities and plan a merit increase considering both their compa ratio and achieved performance level. 

Similarly, ensure alignment more specifically to the external market by considering the market index. When an employee’s salary falls below the market index for their role and experience, they are likely at risk for low engagement at work, and it is customary to at least implement merit increases to bring their compensation in line with industry standards. 

Incentive Planning

You can design incentive plans, basing payout on tracking or achieving a select measure, such as achieving a corporate revenue or net income goal. Design incentive plans for specific pay grades, job titles, employees, or departments. For example, if the organization achieves its revenue goal for the year, then specified departments will receive the target incentives (based on some percentage of their base salary). 

Track any pay that is not part of the pre-established salary agreement, such as holiday bonuses, sign-on bonuses, retention bonuses, and any discretionary incentives. 

Conclusion

Put simply, engagement is good for business. Building a highly engaged team leads to higher profitability, productivity in sales, and lower turnover rates [3]. Organizations can achieve remarkable outcomes, from improved compensation and incentive management to increased employee satisfaction. The integration of compensation incentives is a powerful catalyst for employee engagement and performance. HR and compensation professionals are encouraged to proactively leverage compensation incentives as tools. After facing the challenges of analyzing and designing incentive structures and addressing potential drawbacks, HR professionals emerge as leaders in creating an engaged workforce.

Footnotes

1. Harter, J. (2022, April 25). Disengagement Persists Among U.S. Employees. Gallup. 
2. Forbes Advisor. (n.d.). Monetary incentives in the Workplace. Forbes. 
3. Gallup. (2018, June 20). The Benefits of Employee Engagement. Gallup.

Adrienne Reese is a data-driven professional passionate about connecting insights with impactful user experiences. With a background spanning customer success, compensation data analysis, and technical onboarding, she currently supports product and customer teams at ERI Economic Research Institute as a Data Analyst. Adrienne is also an established film writer, covering various genre films and festival content with a critical eye and love for detailed storytelling. Outside of work, she volunteers at a local theater and is an advocate for inclusive, human-centered technology, media, and creative communities.