What is short term incentive plan? definite guide and examples

A well-designed short term incentive plan can significantly improve employee performance and morale. When employees can clearly see a direct link between their efforts and immediate rewards, it becomes a strong motivator, creating a sense of accomplishment and recognition.

In this guide, we'll figure out what a short-term bonus plan is, look at some examples, explore the benefits, and understand what a company should consider when they want to use one.

What is a short term incentive plan?

A short term incentive plan, or STIP, is a type of compensation strategy that companies use to motivate and reward their employees for achieving specific business goals within a certain timeframe, typically within a fiscal year. The amount or value of the actual incentive is usually proportional to the level of achievement of the set goals.

The incentive bonus is often tied to key performance indicators (KPIs) that align with the company’s strategic objectives. These KPIs can include sales targets, customer satisfaction scores, project completion, or other measurable outcomes.

Unlike the long-term incentive plan, which are designed to reward employees for achieving strategic objectives over an extended period, the main purpose of a short term incentive program is to provide more immediate and tangible rewards for meeting short-term goals.

Note: Every organization has a distinct framework for its STI bonus structures designed to align with its unique business model, strategic objectives, and corporate culture.

Short-term incentive plan vs bonus

People are often confused about the difference between a bonus and a STIP bonus structure. Let’s clarify the differences by using a simple table outlining the key distinctions between the two:

In short, the difference between a short-term incentive plan and a bonus is based on their purpose, performance connection, and frequency. The former is a structured strategy aimed at motivating employees to meet specific business goals, while the latter is a flexible, discretionary form of extra pay that can be granted at any time to acknowledge and reward employees.

Benefits of the short-term incentive plans

Implementing well-designed short-term bonus structures boosts motivation, aligns efforts with goals, and emphasizes the importance of effective incentive compensation management for fair and transparent rewards, contributing to organizational success.

Here are other key advantages of having one within your organization:

• Having short-term bonus plans can help employees do their best, boosting productivity and efficiency.

• These plans tie rewards to specific business goals, ensuring employees contribute to the company's overall strategy.

• Tangible rewards for good performance enhance job satisfaction, loyalty, and reduce turnover, keeping top talent.

• Short-term incentives create a high-performance culture for a competitive advantage.

• Customizable short-term bonus structures adapt to unique organizational needs for effective performance management.

Short-term incentive plans examples

Always remember that short-term bonus plans can take various forms depending on the nature of the organization and its goals. The effectiveness of short term incentive plans rely on their alignment with the organization’s goals and the roles and responsibilities of the employees.

Here are some common examples of STIP:

• Sales Commission

  A good example of a short term incentive plan is sales commission. Sales representatives earn a commission based on the sales they generate within a specific timeframe. This aligns with short-term sales goals and is a fundamental aspect of many sales incentive programs.

• Performance Bonus

  Another common form of short-term incentive is the performance bonus. Employees are rewarded with a bonus for achieving specific, pre-determined performance targets. These targets could be individual, team, or company-wide objectives.

• Spot Bonus

  Spot bonuses are given on the spot to recognize exceptional performance or contributions. They are often used to reward employees who go above and beyond their regular duties. This type of incentive can boost morale and encourage continued high performance.

• Profit Sharing

  While typically considered a long-term incentive, profit sharing can also be structured as a short-term incentive plan. In this setup, employees receive a share of the company’s profits on a quarterly or semi-annual basis.

Elements and creation process of short-term incentive plan

Creating an effective short-term bonus plan involves a strategic and thoughtful approach. Before guiding you through the process of designing one for your organization, let's first explore some elements that play a crucial role in the success of your incentive plan.

• Objectives and Goals: Define specific, measurable, achievable, relevant, and time-bound (SMART) goals aligned with overall company objectives.

• Relevance and Alignment: Link short term incentives directly to individual or team performance, ensuring alignment with key business metrics.

• Transparency and Communication: Clearly communicate incentive details, eligibility criteria, and progress updates to foster trust and motivation.

• Fairness and Equity: Design a fair and equitable plan that provides all eligible employees with a reasonable chance to earn rewards.

• Flexibility and Adaptability: Build flexibility into the plan to adapt to changing business conditions, and regularly review and adjust as needed.

Creating an effective short-term incentive plan

Here's a step-by-step guide to help you design a plan that aligns with your organizational objectives and motivates employees to achieve short-term goals:

1. Step 1. Define Clear Objectives

   Clearly state realistic short-term goals aligned with the organizational strategy, such as financial targets, sales growth, project completion, or improved customer satisfaction.

2. Step 2. Understand Employee Roles

   Understand each role's contribution to short-term goals, identify key performance indicators (KPIs), and recognize unique contributions of different departments.

3. Step 3. Align with Organizational Strategy

   Ensure the incentive plan aligns with the broader strategy, supporting short-term goals while reinforcing company values and contributing to the long-term vision.

4. Step 4. Select Appropriate Performance Metrics

   Select specific, measurable metrics directly tied to short-term goals, such as sales targets, project deadlines, cost savings, or customer satisfaction scores.

5. Step 5. Determine Performance Thresholds and Targets

   Establish clear performance thresholds and challenging targets for incentive payouts, ensuring they reflect both minimum acceptable performance and ambitious achievements.

6. Step 6. Design Incentive Structure

   Consider workforce preferences and motivations when determining incentive structures, whether cash bonuses, gift cards, extra time off, or other non-monetary rewards. Decide on individual, team-based, or company-wide incentives based on goals and collaboration.

7. Step 7. Communicate Clearly

   Develop a comprehensive communication plan to transparently convey the incentive plan details, objectives, and performance metrics. Encourage open communication to build trust and address employee questions or concerns.

8. Step 8. Monitor and Evaluate Performance

   Set a timeframe for achieving short-term goals and establish timely and linked incentive payouts based on performance milestones.

9. Step 9. Review and Adjust

   The final step in creating a well-designed short term incentive plan is to establish regular reviews. Gather feedback from employees and stakeholders, and make necessary adjustments to keep the plan aligned with organizational goals in dynamic environments.