Short Term Incentive Plan or STIP
Short term incentive plans can be complicated for those who are new to them, but serve as an important incentive for employees in a company.
Offering annual, quarterly, or in some cases, even monthly short term incentives to a company’s employees could be a great way to drive retention and engagement if done the right way. One of the best things about short term incentive plans is that there is a wide range of different types, ensuring organizations can choose according to their particular needs.
Determining the right short term pay for performance plans can be a bit difficult, especially if your company is offering it for the first time. In this piece we will take a close look at some standard measurements methods and metrics that could come in handy when deciding payouts. With the right payout, employees will be more willing to contribute towards bigger goals, as long as they are in a group.
Short Term Incentive Plan (STIP)
Short term incentive plans can be complicated for those who are new to them, but serve as an important incentive for employees in a company. It not only increases employee motivation, it also ties the company’s goals with that of the staff, resulting in better company growth. But first its important to cover what they are and what advantages they bring to a company.
What is a Short Term Incentive Plan or STIP?
Also called annual incentives, the main purpose of short term incentives is to provide staff with compensation for reaching the organization’s short term strategies. In most cases, compensation committees determine the reward by looking at each employee’s individual contribution. The nature of each business goal could vary significantly depending on the type of company strategy, maturity and nature of the business, market conditions, employee’s role, and plenty of other factors.
Short term incentive metrics are mostly financial, such as maximizing profit, return on capital, revenue growth, and others. A large number of companies even utilize some non-financial metrics, as long as they are in sync with the organization’s strategies, like quality assurance hurdles, meeting safety standards, or development and delivering new products or businesses.
Companies typically offer annual incentive opportunities by adding a certain percentage on top of their employee’s salary. The more the executives generate revenue and reach their targets, the better their payouts will be. Usually, any performance lower than the determined threshold results in no payouts. On the other hand, performances exceeding maximum layout are often capped at a certain level, to minimize risk taking.
What are the Advantages of Short Term Incentive Plans?
Short term incentive plans are incredibly useful as they offer employees a straightforward way to achieve and set their goals (often within a year). They are a significantly better option than other incentive strategies that take multiple years to complete. What’s more, measuring the performances of employees and executives is remarkably simpler during shorter periods.
In addition, there is also a high likelihood that most employees will remain in their current positions within a year. When it comes to long term incentives however, an employee’s position could chance multiple times while the incentive is operational. Suffice to say, short term incentive plans offer plenty of advantages. Let us look at some of them below:
- Companies can attach their employee’s compensations with profits
- Short term incentive plans give workers an opportunity to share the organization’s success
- They allow you to focus on particular results and outcomes
- STIPs could significantly improve an employee’s performance
That being said, as with almost every type of reward programs, organizations should ensure their short term incentive plans blend intrinsic and extrinsic motivators to get the most out of their employee’s efforts. Of course, bonuses and cash awards can improve performances, but solely relying on them would not be a wise choice. Why? Because in most cases, they may not be sufficient for sustaining engagement in the long run.
Types of Short Term Incentive Plan or STIP
As mentioned earlier, there are plenty of short term incentive plan types for companies to choose from. Each STIP type offers unique benefits, motivating employees to achieve their company’s business goals in shorter periods.
Before we proceed, it is worth noting that short term incentives are essentially additions to the regular pay offered to employees within an operating year. Some companies also refer to this as variable pay, depending on performances and certain events.
Payouts for any period beyond the regular weekly work hours are considered as overtime pay. They are a handy device for minimizing the costs associated with cutting payrolls. Most jobs need people with skills and specialized knowledge about the industry, which is why many companies ask certain employees and executives to work overtime.
If some are part of a mandatory overtime program, refusing to show up could lead to contract termination. In most cases, employees tend to appreciate the chance to earn more, as long as the overtime does not become overwhelming. Companies that do not pay overtime salaries are mostly overstaffed. What’s more, the rates for overtime payments could significantly vary depending on the time of day, week, or month.
Holiday, Weekend and Shift Work
Organizations that ask workers to work second or third shifts often give them some shift differential. As you would expect that later the shift, the higher the premium will be. Besides the payout, late shifts also prove to be handy for employees for other reasons, like going to college during the daytime.
Premium rates vary based on the day and time a company requires its employees to work. Usually, they receive double pay during holidays and weekends, compared to regular overtime work.
Differentials and Premiums
Differentials and premiums are a great way to offer employees with rewards. Why? Because they incentivize them to contribute beyond normal or ordinary situations. It would be fair to say that premiums and differentials are essentially extra compensations for any effort usually considered inconvenient, hazardous, burdensome, or even distasteful.
For those who don’t know, work premiums must be compliant of the Compensation Act (work hours, minimum wages etc.) They may also depend on things like union acceptance, the organization’s nature, decision making and policies.
Units Produced Bonuses
This is a tried and tested, albeit slightly old incentive program in which workers receive their payments based on a particular measurable output known as “payments for units produced”. When implementing this strategy, businesses should study and analyze their entire operation, creating a highly efficient workflow process and method to perform tasks with high efficiency.
Incorporating this strategy is a great way to achieve the following:
- Establish a decent level of pay for employees working on tasks with short deadlines
- Finding out an acceptable metric/level of performance for the regular working time
- Determining the time needed for employees to produce output
Performance Based Short Term Incentive Plan
The performance based STIP is arguably the best short term incentive plan example. It provides individuals with excellent opportunities to earn more while increasing the company’s profitability in the short run by reaching targets quickly.
Performance Sharing Plans
Some workers tend to have more influence on the final outcomes of performances. For instance, if a company rewards groups according to customer satisfaction, it would be fair to assume that the customer service team had a direct impact for reaching that goal. Therefore, companies should measure teams according to their exact roles and contributions.
Plans similar to performance sharing plans need a lot of upfront work to determine the areas that require improvements. Therefore, it is crucial to create realistic goals, making sure you have sufficient budget for accommodating payouts. Organizations should also consider the likelihood of their teams meeting their set goals.
For example, if everyone from the team fails to meet their objectives, it could give rise to a toxic atmosphere within the company because of employee resentment. On the other hand, if everyone reaches their targets, it could significantly boost the organization’s morale, but tough on the company’s budget.
Individual Performance Based Plans
In many cases, employees tend to pay more attention to individual goals, which could be detrimental to the organization’s overall performance. Therefore, it would be best if employees aligned individual goals with organizational objectives, making sure they prioritize both. That said, there could be scenarios where workers approach this with a narrow point of view to maximize their payout. This can cause a lot of negativity, creating tension among workers with similar roles.
Short Term Incentive Plan on Eqvista
You can create and implement short term incentive plans on the Eqvista app, and manage all of your STIP plans for your shareholders on one platform. After setting up these vesting plans, you can even apply them to many shareholders at one time.
Here is how to set up an LTIP plan on the Eqvista App:
From the dashboard go to “Cap Table” on the sidebar, and click on “Vesting and Plans”. From this page click on the button “Create Vesting Plan” which will bring you to the following page:
In this example, Let’s say the company sets up a 1 year Stock Appreciation Rights (SAR) plan, which the employee will gain the difference between the initial share price and ending share price of the STIP plan. They receive 10,000 SARs on a 1 year plan, with 70% individual based milestones and 30% company based(Sales Team) milestones. Here this scenario was set up accordingly in the vesting schedule.
After setting up the STIP, you can mass apply these to different grants sharing the same plan.
Here we can see this plan can be applied to different grants under the share class “Founder Shares”. Once this is complete, the vesting plan will be applied and the share will start vesting according to the start date.
Once in the share grant page, you can see how each STIP milestone will be shown, and how many shares have vested. In this case most of the milestones were completed according to the completion dates inputted, with 8,250 shares of the 10,000 shares vested. Let’s say the employee Mike Evans plans to exercise his SARs, with the difference of the company’s share price over the 1 year being $1.25. In this case, Mike would receive $10,312.50 for his hard work completed over the year. This resulted in a nice bonus and great incentive for him, as well as the desired results of higher profitability of increased sales for the company.
Every company has its own system for rewarding and calculating payouts for short term incentives. Determining which short term incentive plan type would be most beneficial for your company could vary depending on the nature of your business, the way you intend to evaluate and motivate your workers, organizational goals, and others. Nevertheless, short term incentive plans can be incredibly beneficial if you use the right way.
We at Eqvista can help you with that, making sure you can focus on important aspects of your company while our experts take care of equity transactions. Our equity management software is perfectly suited to help you manage your STIPs or other incentive plans, and administer them among your employees.