The year 2025 is marked by persistent economic instability. Against this backdrop, many companies are questioning their approach to compensation: how can they maintain a competitive remuneration package, while preserving the organization's financial capacity?
What if we were to move away from the binary logic of salary increase or freeze? What if we were to consider a more flexible incentive structure, allowing greater alignment between organizational results and the recognition offered to employees?
It's not a question of pitting fixed remuneration against bonuses. The two dimensions are complementary: base pay ensures stability, while variable pay provides recognition more directly linked to results.
Why consider an incentive compensation program?
Before integrating incentive mechanisms, it is essential to ensure a sound salary base: one that is fair, competitive and well positioned in relation to the chosen strategy. Without this, the addition of bonuses could be perceived as a way of compensating for a more fundamental misalignment, thereby damaging the program's credibility.
In our previous article, “Establishing a compensation strategy aligned with the company's financial capacity”, we explored avenues for maintaining the attractiveness of your total compensation package without relying exclusively on strict alignment with the market median.
In an uncertain economic climate, some organizations are seeking to limit their fixed costs while maintaining team commitment. Incentive compensation can be an interesting way of doing this, by introducing a results-sharing model: recognition is linked to collective performance, thus fostering team accountability and transparency.
That said, a poorly calibrated program can have counter-productive effects. It is therefore essential that objectives are measurable, achievable and directly influenceable by the teams concerned. The balance between fair recognition and aligned behaviors is the key to success.
Encourage a collective approach to variable compensation
Traditionally, variable compensation is based on individual performance. However, organizations benefit from exploring collective models, especially when results depend on team effort or inter-departmental synergy. These plans can be short-term (for example, on an annual cycle) or longer-term, often aligned with the strategic planning cycle.
The most common short-term programs are :
- profit-sharing, which redistributes a portion of realized gains;
- target bonuses, granted on the basis of defined objectives.
Long-term programs include :
- stock grant or stock purchase plans;
- stock appreciation rights;
- target bonuses, with deferred payment mechanisms;
- supplementary pension plans.
These long-term programs are more frequently offered to senior executives.
Aligning compensation with strategic objectives
Incentive compensation is more than just a reward. It's also an organizational steering tool. When well designed, it steers employee behavior towards the organization's priorities.
Let's take a concrete example: if winning market share and customer satisfaction are strategic priorities, an incentive compensation program based on these indicators can encourage employees to adopt behaviors aligned with these objectives. This type of program also makes it possible to share the financial risk with the teams: rather than granting fixed increases that put a long-term strain on the payroll, the organization chooses to recognize efforts when results are achieved. Thus, in periods of weaker performance, costs are contained. And when the company reaches its targets, employees benefit directly from the collective success.
Efficiently structuring your incentive compensation program
1- Diversify performance indicators
It is essential to evaluate several indicators to avoid employees focusing their efforts on a single aspect, to the detriment of other key factors. For example, in a sales team, incentive compensation based solely on sales could encourage the maximization of volumes to the detriment of profit margins or customer satisfaction.
2- Define clear thresholds and triggers
An effective program is based on well-defined indicators, accompanied by minimum thresholds (triggers). If these thresholds are not reached, the bonus may be cancelled. In addition, multiplying factors can be added to reward exceptional performance, or to limit bonuses when results are merely satisfactory. To be able to identify these thresholds and multiplier factors, it is essential to assess the effort required to meet or exceed targets. The greater the effort, the more significant the recognition should be.
3- Adapt objectives by department
For commitment to be real, employees need to see a direct link between their actions and the desired results. Hence the importance of translating strategic objectives into operational targets for each department.
Best practices to ensure program fairness and longevity
While incentive compensation offers many advantages, it is crucial to ensure its viability. This involves :
- simulations and scenario tests, to avoid excessive multiplier factors generating unforeseen costs;
- consideration of pay equity, in line with legal obligations and good internal equity practices. A relevant approach is to define a target percentage of incentive compensation according to job category;
- transparency in implementation, so that employees understand the mechanisms for calculating bonuses and can fully commit to them;
- consistency with the organization's business model, to ensure that the behaviors encouraged truly support strategic priorities.
Conclusion
Incentive compensation can become a real management lever in times of uncertainty, provided it is well-calibrated, transparent and aligned with the organization's objectives.
It does not replace a healthy salary structure, but complements it. By keeping fixed costs under control in times of slowdown, and rewarding collective effort when performance is strong, it creates a more flexible and resilient recognition model.
Used judiciously, incentive compensation fosters commitment, reinforces attractiveness and contributes to an organization's financial health. A strategic tool to consider if you want to weather economic cycles... with agility and consistency.
