A Brief Introduction of Incentive Plan
In the last few years, it has become important for organizations to create an incentive plan for their employees. Doing so doesn’t just motivate the employees but also helps the organization in achieving desired goals. Contrary to popular belief, incentives and bonuses are not the same. Bonuses are given for past achievements, while incentives are goal-oriented.
Deciding an incentive scheme or plan is not as easy for an organization as it seems. It requires a lot of planning. Organizations have to make sure that their plan is solid and effective. There are various goals that a company sets for itself, but you have to decide which goal you want to incentivize. It can be revenue, customer base, sales, etc.
An agreement signed between the employer and employees that have all the details related to the incentives is known as Incentive Plan Agreement. There can be different kinds of incentive plans, such as equity incentive plan, management incentive plan, employee incentive plan, and compensation plan.
Other names for this plan are the Equity Incentive Program, Employee Equity Incentive Plan, and Incentive Stock Options.
When Do You Need an Incentive Plan?
When a company starts to feel the need to compensate their employees for the hard work they put in for the company, they use the incentive plan. The plan is needed when a company has certain goals that can be achieved easily if incentive plans are put in place. It should be noted that the incentives can be given in many forms, such as equity, shares, or cash. Incentive plans also ensure that the employees feel like they are part of the organization and are valued.
Purpose of Incentive Plans-
- It helps the organization achieve certain goals
- It motivates the employees to work hard
- It makes employees feel like they are an integral part of an organization
- It helps the employer retain employees
- It brings both the parties on the same page
- The agreement makes the incentive plans legal deal between both parties
- The agreement helps both parties understand the plan
Inclusions in the Incentive Plan
This plan is usually created by a committee in the organization. The members of this committee are selected from the company’s board of directors. The agreement must contain the basic details of both the employer and employee. Basic details include names, phone numbers, addresses, etc.
It should also include the details of the entire incentive plan, which includes the type of incentive, conditions, how and when it will be released, what the goals are, etc. If the company is sharing the stock or equity with the employees as an incentive, then the agreement must include the details of the same. The agreement must include important clauses such as termination, cancellation, force majeure, etc. If any interest or insurance is applicable, then the agreement must have details of that as well.
How to Draft an Incentive Plan?
Before drafting the agreement, the employer must try to communicate with the employees about the terms and conditions of the agreement. An employee must understand all the clauses perfectly before he or she signs the agreement. They must also understand their responsibility entirely.
As mentioned above, a committee decides the incentive plan. This committee administers the payment of stocks, restrictions, terms and conditions and guidelines. How the incentives are calculated is one of the most important aspects of the plan, the employer must ensure that they make a solid yet simple pay scheme. The company also has to ensure that the well-drafted incentive plan helps it grow and achieve its goals. The plan should attract and retain employees.
However, it should not pitch one employee against another. It is really important for any organization to maintain the sanity of its employees. Since it is a legally binding agreement, the employer must include the governing law details in the agreement and also a dispute resolution method that can ensure that there are no misunderstandings and confusion.
Benefits & Drawbacks of the Incentive Plan
A well-drafted Incentive Plans help everyone involved. It boosts the company’s growth and motivates the employees to do better. There are no drawbacks to this agreement if the employer ensures that the employees are not pitched against each other and are self-motivated to work towards the bigger goal.
Here are some of the major benefits of the agreement –
- It motivates, attracts, retains and inspires employees
- It helps the company achieve a bigger goal
- It boosts the success of a company
- It helps the company work on their stock sharing program
- It ensures there are no confusions and misunderstandings
- It provides a dispute resolution method
Key Terms/Clauses in Incentive Plan
Each employer can have different terms, conditions, and clauses for their Incentive Plans. However, some basic terms such as cancellation, termination, force majeure, legal remedy, obligations, disclosure policy, etc. remain the same in all such agreements. There can be a long term incentive plan or annual incentive plan.
Depending on the company’s requirements, the time period can vary. It is important for the employees to understand all the key terms and clauses before signing the agreement. It reduces the possibility of any kind of conflict or confusion.
What Happens in Case of Violation?
This is a legal document. It protects both parties. However, it’s legality mostly helps the employees as the employer can’t cheat employees. In most cases, both parties refer to the agreement and its terms and conditions to sort any conflict. However, in case of any violation from either party, the other is well within its rights to approach the court. Both parties can also decide to name a mediator in the agreement who would help them solve the conflict in less time. It is suggested that both parties should know their legal options before they sign the agreemen
This plan is also a great way to retain employees. Employees also feel motivated to work hard in an organization because of a solid plan.
Companies should ensure that the employees don’t get unnecessarily competitive to earn incentives. The agreement should be drafted carefully by the employer. How the incentives are decided is one of the most important aspects of the agreement, so the committee must design it with precision. It should be fair to the employees and should also work in favor of the employer.
Here is the sample drafted by our experts. Download the PDF form here and customize it as per your need.
Sample for Incentive Plan
Incentive Plan Agreement