27 Sep The Power of Using Incentive Plans to Set Three Goals for Employees
The Rule of Threes is a practical and effective approach to incentive pay which states that there should be no more than three defined goal levels for each incentive plan. These goals should include the following three tiers:
- Threshold: the good enough, or bare minimum performance level which should be achievable with 80-90% probability
- Target: achievable but difficult; the equivalence of doing a good job with a 60-70% chance of achievement
- Excellence: the maximum level of performance which exceeds expectations; possible but not always plausible, with a 10-15% probability of being reached
Why Three Goals?
The reason for using three levels of achievement to gauge performance on your metrics is simple. Too many levels can become complex and difficult to remember. Plus, this approach aids in your ability to clearly communicate the purpose of the program, which is to hit the target and aim for the maximum.
Two-thirds of HRsoft poll takers say that their organizations set the target level for their incentive plan based on mathematical projections of what may be possible. This is a best practice and is more appropriate than setting a target aligned with max payout, which 17% of companies polled do. Aligning target levels with the max payout is the most common reason for people to cheat on incentive plans. For instance, employees may over-project revenue at the end of the year, or move some of next year’s revenue into the current year just to reach a target. If you set a target at max, you probably won’t have much else for employees to reach for below it. While this may be appropriate for one-and-done projects with strict deadlines, the instances in which these types of plans work successfully are rare.
Ultimately, three goals identify for your employees what has to be done, what should be done, and what can be done (or, what they have the potential of doing). At the threshold or “good enough” level, 50-75% of the target should have been reached, while 100% is met at the target level. To exceed expectations, employees should deliver 150-200% of the target value.
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