Incentive Plans vs. Retention Plans: Which Is Best?

According to a study by Gallup, highly engaged employees result in a 23% increase in profitability.

And you can create that kind of engagement by ensuring your employees feel valued and well-compensated.

Here at Consolidated Planning, we know that helping business owners plan for their future starts with keeping their key employees TODAY.

Incentive and retention plans are great ways to help your employees feel engaged at work. After all, a positive work culture is wonderful but without feeling valued and compensated, it’s not enough. Here, we will help you understand what an incentive and retention plan is. You will learn the benefits of each, as well as the benefits of a combination approach, all to decide which option is right for your business goals.

What Is An Incentive Plan?

Incentive plans are designed to motivate employees by linking their performance to tangible rewards. These rewards often come in the form of bonuses, profit-sharing, stock options, or other financial incentives. The primary goal is to encourage employees to either continue performing at their same level or even go above and beyond their regular duties, driving the overall success of the company.

Incentive plans have to be tied to something the company measures. And that measurement needs to:

• Resonate with the employee as something they have a direct impact on and know it, and
• Be attainable to that employee, otherwise it builds no value for them

One option that may be effective for business owners is offering a grid structure for incentive plans. This is a great way to measure an employee’s impact, on an annual basis preferably. To be eligible for the incentive plans, business owners will often opt to make a prerequisite to even be entered into the grid structured incentive plan – making it a big deal to employees.

For example, with compounding productivity year after year, the incentive would also compound, being paid out yearly. With an employee less than a year out from reaching the next grid level, that’s very appealing to keep them around.

Benefits Of An Incentive Plan

#1 Immediate Recognition: The rewards of an incentive plan are often immediate or provided shortly after the achievement of the desired performance.

#2 Sense of Clarity and Transparency: Incentive plans often require well-defined performance metrics, helping to promote clarity and transparency in evaluating employee contributions.

Drawbacks Of An Incentive Plan

#1 Reduced Staying Power: With more of relative quick payout, incentive plans don’t have staying power beyond 12 months.

#2 Neglect of Long-Term Goals: There is a risk that employees may focus solely on tasks that directly contribute to the incentive, potentially neglecting other aspects of their job or the organization’s long-term goals. Overtime, this approach can lead to a lack of business growth and productivity.

What Is A Retention Plan?

Retention plans, on the other hand, are strategic initiatives aimed at fostering a long-term commitment between employees and the company. These plans focus on creating a positive work environment, offering benefits that enhance work-life balance, and providing opportunities for professional development.

Benefits Of A Retention Plan

#1 Reduced Turnover Costs: The right retention plans build a sense of loyalty and commitment overtime, leading to less turnover, therefore less cost and more stability in the workforce

#2 Preservation of Knowledge and Experience: Long-term employees often accumulate valuable knowledge and expertise about the organization, its processes, and industry-specific insights. Retaining these employees helps preserve this knowledge within the company.

Drawbacks Of A Retention Plan

#1 Costs of Implementation: Creating and implementing a comprehensive retention plan can involve significant costs. However, with the right business planning expert, there are ways to fund these retention plans each year, making it more cost effective for business owners.

#2 Equity and Fairness Concerns: If certain employees perceive that others are receiving preferential treatment as part of the retention plan, it can lead to dissatisfaction and resentment. Ensuring that retention efforts are fair and transparent is crucial to maintaining a positive work environment.

Why A Combination Of Incentive And Retention Plans Are Effective

Retention plans are designed to RETAIN employees, of course. But that’s not to say that incentive plans can’t keep employees happy – because they do. However, the addition of an incentive plan tied to a retention plan helps lead key employees down the path, if you will.

It’s important for business owners to consider a combination of incentive and retention plans to achieve optimal results. By understanding the distinctive features and advantages of each approach, owners can create a comprehensive strategy that not only attracts and motivates top talent but also cultivates a workplace where employees are committed for the long haul. In this dynamic equilibrium, businesses can thrive, propelled by a motivated, dedicated and unified team.

For example, if we look back at the incentive example for purposes of a combination plan, you can fund the future benefit of a retention plan based on each year’s sales volume. With a combination of an incentive and retention plan, the vesting period would ideally be shorter than a typical vesting timeline.

Which Plan Is Right For Your Business?

While both incentive and retention plans are valuable tools for business owners, the key lies in striking the right balance. Incentive plans can be effective in driving short-term performance and achieving specific targets, while retention plans focus on the long-term commitment of employees.

Determining the right plan depends on your business goals.

Where do you hope to be in the next five years?

What level of commitment do you KNOW you have from your key employees?

The right plan for your business requires innovative thinking and creativity, to best foster a culture of continuous improvement, problem-solving, and ultimately increased business profitability.

2023-165657 Exp. 12/2025

Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.  

This material contains the current opinions of Mike Thompson and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.