What is the Rule of Threes & Why Does It Exist?

What is the Rule of Threes & Why Does It Exist?

The Rule of Threes is a simple yet powerful approach to incentive planning. It provides guidelines help organizations maintain a healthy degree of control over incentive pay, yet allow for enough flexibility to meet the evolving meets of your organization. The Rule states that:

  • There should be no more than three metrics for any plan
  • There should be no more than three defined goal levels for any plan
  • There should be no more than three incentive plans for any one individual

 

Why Only Three Metrics?

According to an HRsoft poll, more than a third of companies surveyed use four or more metrics in their annual incentive plans. While this approach may work for certain sales plans, having more than three metrics tends to present issues for annual incentive plans. The Rule of Threes exists because most people will focus on the two or three metrics that are most likely to benefit them. Additionally, goal levels generally work best with a target in the middle, a floor at the bottom, and exceptionalism at the top. Moreover, the restrictions force stakeholders to put real effort into determining the most important aspects of the program.

While identifying three key metrics from the beginning makes the design process a bit more difficult, it forces stakeholders to be clear about what it is the company is trying to accomplish. Likewise, it allows employees to focus strictly on these topmost priorities, instead of going through the process of trying to prioritize objectives for themselves. With too many metrics, employees may lose sight of what really matters. And, employees may also decide it’s simply not worthwhile to pursue a higher number of goals. After all, if you’re paying out incentives at 30% of a worker’s base pay, and there are eight metrics to consider instead of three, the incentive amount becomes smaller, and thus less likely to win the attention and effort of your most valuable employees.

At the other end of the spectrum, there are also some risks associated with not using enough metrics. Nearly a third of participants in the HRsoft poll referenced above don’t use any metrics in their annual incentive plans at all. In reality, a plan without metrics is really a bonus program, in which employees may be rewarded in the event that something positive happens. This is common in very small companies that may not know what to measure, but larger firms typically need metrics. Otherwise, they’re not incentivizing employees to do anything, but are rewarding them in the event extra money is available.

For the majority of companies, using incentive plans to focus on three key metrics allows them to hit a sweet spot in which employees can dedicate their best efforts while stakeholders have their most important priorities met.

 

HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and allocation of merit, bonus and equity awards to drive manager and employee engagement.

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