What Is Short Term Incentive Administration?

Should Your Company Use Incentive Compensation?

What Is Short Term Incentive Administration?

Short term incentive administration refers to the awards given in a time period of up to one year. Also sometimes referred to as annual incentives, short-term incentives are typically tied to contributions which have the greatest impact on company performance and are used to inspire goal achievement. The nature of these goals should reflect current business priorities, while also factoring in aspects like market conditions and company strategy.

Which Outcomes Do Short Term Incentives Support?

According to research conducted by Mercer, metrics like revenue and operating incomes are typically the basis for short term incentives. While the majority of employers use metrics like profits to frame their short-term reward decisions, non-financial metrics can also be used. The Center on Executive Compensation explains that some non-financial short-term objectives employers might incentivize could include new product delivery, safety or quality assurance outcomes, or new business development.

What Are Their Advantages?

Short-term incentives are useful because it’s often easier to set and achieve goals within a year’s time than it is for multi-year objectives. Likewise, it’s simpler to measure performance over shorter periods of time. It’s also more likely that employees will still be in the same position in the company within a year; whereas with long term incentives, an employee’s role may shift in the two to five years during which the incentive is active.

According to Towers Watson, there are many benefits of using short term incentives, including the abilities to:

  • tie compensation to profits
  • give employees a chance to share in business successes
  • focus on specific outcomes
  • encourage better performance

Nonetheless, as with any types of total rewards programs, it’s also important to make sure your short term incentive plans balance both extrinsic and intrinsic motivators. While cash awards and bonuses can propel employee performance, they’re usually not enough on their own to sustain long-term engagement. Thus, it’s essential to also provide employees with supplemental means of motivation which they most value, like development opportunities.

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