An incentive plan to reward and retain key employees
21 October 2019
A good employee is worth their weight in gold! Well that may be taking it a bit too far but the point is they are very valuable to your business. No doubt to get them to this point you have invested heavily in training and provided the opportunity for them to grow and develop. You think the pay and conditions offered are good and comparable to what other farmers are offering, but you don’t really know for sure. You have come to rely on your worker and they have an extensive understanding of your farm enterprise. In reality he/she is like a manager, particularly with the day to day operations. This has allowed you to have more family time and focus on the business rather than always playing catch up on the farm. This is what you have always wanted in your business and wonder how you ever coped previously. Which makes you stop and think – How do I continue to keep this person engaged and less inclined to look elsewhere for a career change?
Research has shown that work conditions are as important as the level of wage paid. Equally as important is a bonus or incentive plan to maintain engagement and reward team members. A bonus system that also involves loyalty is becoming more and more common in many industries. Also known as a Long Term Incentive Plan (LTIP), this essentially establishes a criteria on how the bonus will be calculated. This is reviewed annually and assuming all boxes are ticked, the bonus amount is added to the ‘bonus pool’. The bonus pool can be accessed in a future year and a prescribed percentage can be withdrawn by the employee. Take the following example:
The Farmer and Worker determine the criteria for the bonus system to be reviewed annually and equal to 10 percent of the Worker’s normal wage. Let’s assume for simplicity this is $6,000. If achieved the bonus is added to the bonus pool and can be accessed from year 3. From year three 30% of the bonus pool can be withdrawn each year. The following table sets out what could happen over the next 5 years.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
|---|---|---|---|---|---|
| Annual LTIP Deposit | $6,000 | $6,000 | $6,000 | Not achieved | $6,000 |
| Total LTIP Balance | $6,000 | $12,000 | $18,000 | $12,600 | $14,820 |
| Less Eligible Withdrawal (30%) | Not eligible | Not eligible | $5,400 | $3,370 | $4,446 |
| Remaining LTIP Balance | $6,000 | $12,000 | $12,600 | $8,820 | $10,374 |
The key is to clearly establish the rules on how the LTIP works including the requirement to be an employee to access the pool balance.
This is just one example of an incentive or bonus system for your team. However in practice we think this one works well as it recognizes the longer term nature of the employment relationship rather than just looking at a year in isolation.
For assistance in developing the criteria to assess the bonus structure and formalizing the arrangement alongside the employment agreement please do not hesitate to contact us.
Latest News
When it comes to hiring employees, factors such as employer responsibilities, recruitment and employee onboarding play an important part in the process. Speaking with Gavin Nash on the FS360 Podcast, Natalie Grohn from Evolve Online Bookkeeping outlined the other important factors to be considered in the hiring process.
Short Stay Levy Victoria - explained by our Legal Team at Mulcahy & Co.
The Trump Administration's imposed tariff's have resulted in share market volatility and a lot of negative news.
We’re delighted to invite you to an exclusive session with Andrew Hunt, InvestSense's independent economist. Based in the UK, Andrew has a unique ability to read global economic trends and decipher what they mean for Australian investors.
