Here's How to Increase Employee Retention with An Incentive Pay System

 “By implementing an incentive pay system, you can compensate workers for their role in helping you achieve business goals,” says Ryan Milhollin, University of Missouri Extension agricultural economist. Incentive pay can also encourage employees to stay with your operation. That's an important priority given today's tight labor market.”

Based on performance, incentive pay encourages a productive work environment and strong workplace morale. It also may make employees proud of their work and attract workers who enjoy the opportunity to earn more as they perform well.

Businesses have multiple incentive pay options to consider, Milhollin says. They include:

• Formal bonuses: These are most frequently cash-based incentives. They can serve as tools to acknowledge work anniversaries, seasonal work effort, project milestones, holidays and good safety or work performance. But they’re limited in their effectiveness if they create morale issues and if employees start to expect them as basic compensation.

• Informal bonuses: These bonuses can show employees their unique contributions are valued, and they tend to be paid irregularly with cash. You can award informal bonuses if employees demonstrate specific instances of positive performance or leadership, share beneficial ideas with the team and celebrate personal successes or occasions, such as marriage or community involvement.

• Profit sharing: With profit sharing, employees earn a portion of the operation’s profits. Because the amount they earn depends on the business operating profitably, employees should feel incentivized to improve the business’ bottom line. They may also feel more personally invested in the operation’s performance. Make sure your operation’s goals are clearly defined.

• Employee Stock Ownership Plan (ESOP): Another tool to create an ownership opportunity for employees, an ESOP uses a formula to assign shares, which along with cash may be maintained in an ESOP trust fund, to employees. Later, if employees have vested in the ESOP and they leave the operation, then they may exchange shares for cash.

To determine which option to use, define your business’ objectives, Milhollin suggests.

For example, if your goal is to improve product quality, then your incentive pay system may be based on the grade assigned to your harvested products. Or, if your goal is to increase employee productivity, then your system may reward employees for handling or harvesting a certain quantity of product in a certain time period.

As you develop your incentive program, determine how you will record employee performance. An accountant, attorney, consultant or extension personnel can be good resources as you create an effective incentive pay system.