An important aspect of creating and implementing an incentive compensation plan for your company is measuring an employee’s performance against an established goal. There needs to be a concrete way to decide whether an employee met the criteria needed to earn their incentive. The goals should be clearly established and transparent to employees so that they know what to work toward.
Generally, all incentive compensation goals fall into two categories: quantitative and qualitative. In some cases, there might be advantages to implementing both types of goals into your company’s plan. Here is more information about quantitative and qualitative goals for incentive compensation so that you can develop a plan that works best for your needs.
A quantitative goal is a numerical goal that an employee can reach to earn incentive compensation. It should be as specific as possible and include a timeline for the performance rating, whether it be an average per day over the course of the year or the total amount needed for the quarter.
Some examples of quantitative goals for incentive compensation include:
- Maintaining a 98% accuracy rate
- Company-wide earnings of $2 million
- Increase YOY sales by 8%
- Close 3 new client accounts
- Process 10 orders a day
- Assemble 100 parts a week
- Sign up 50 customers for credit cards in a year
Quantitative goals can be for the company or for the individual employee. Employee-specific goals can effectively motivate employees, as they can see the direct relationship between their work and additional compensation. However, company-wide goals can have a positive impact on workplace morale, especially for staff members in support roles that could not be measured quantitatively.
Advantages of Quantitative Goals
There are many advantages to using quantitative goals to measure employee performance. First, it’s simply easier to figure out whether someone met the goal. There isn’t any subjectivity. Either employees reach the metrics or they don’t. Employees won’t have a reason to feel that their manager doesn’t like them because they didn’t give them high enough ratings to get the incentive compensation reward.
In addition, quantitative goals can change each year to be more competitive. If an employee closes 5 new accounts this year, you can aim to have them close 7 accounts next year. Different amounts of compensation can be offered for closing 7 accounts versus 5 accounts. This can help motivate employees to perform better.
Disadvantages of Quantitative Goals
Quantitative goals won’t work for every type of employee. For example, it can be difficult to assign a number-related goal to someone in a purely administrative role. They don’t work to close accounts or increase revenue, even though their work is equally important to the company’s performance. In this case, some qualitative goals could be better.
Unlike quantitative goals, qualitative goals do not have specific or concrete numbers to measure performance against. To develop an incentive compensation program that employees perceive as fair and effective, you need to figure out how to make qualitative goals measurable. This can be as easy as setting up a scale from 1 to 5, where 1 is “does not meet expectations” and 5 is “exceeds expectations.” An employee’s manager can rate their performance as a part of their annual review.
Some examples of qualitative goals for incentive compensation include:
- Works well with others
- Positive attitude
- Follows through on commitments
- Is trustworthy
- Finds opportunities to learn and grow
- Volunteers to help others
- Shows up to work on time
Advantages of Qualitative Goals
Qualitative goals make it possible to assess employee performance when quantitative goals are not possible because of an employee’s position or duties. Plus, qualitative goals put a priority on a person’s actions and character, even if it doesn’t make a direct impact on the company’s profitability. Having a team of employees that are trustworthy, positive, and focused on learning makes for a better workplace.
Disadvantages of Qualitative Goals
Employees can perceive qualitative goals as subjective. If they receive lower ratings than they expect, they may believe that their manager doesn’t like them or didn’t want them to succeed. Without numbers that work the same way for all employees, this can be difficult to ensure that employees believe their ratings are fair.
How to Choose Between Quantitative and Qualitative Goals for Incentive Compensation
There are two primary considerations when it comes to choosing a quantitative or qualitative goal for incentive compensation plans. First, you should determine if certain aspects of an employee’s job can be measured. If so, you can use quantitative goals for incentive compensation. Second, you should think about the type of workplace environment that you want to foster and if qualitative goals could help to create a positive culture.
In most cases, a combination of both quantitative and qualitative goals creates the most effective incentive compensation programs. Everyone should have something to strive for. By making qualitative goals measurable, employees have something to improve or work toward each year.