Short-Term Incentives More Popular than Long-Term

October 18, 2007 ( - Private companies rely more heavily on short-term incentives such as bonuses than long-term incentives to reward and motivate employees, while long-term incentives are mostly reserved for those in the upper echelons, according to the findings of a new study.

Nearly 80% of private companies use short-term incentives, compared to about one-third of companies who say they have a long-term incentive program, according to the study by WorldatWork and Vivient Consulting.

Companies’ approximate budgets for short-term incentives range from 2% to 12% of operating income, with 6% being the median. The budgets were fairly consistent across companies of different revenue size.

According to the authors, fewer companies have long-term incentives because of the cost and complexity of implementing the plan. Impediments to creating short and long-term incentive programs include costly or difficult equity valuation, complexities arising from the ownership structure and competitive data that are geared to public companies.

The study also found that the most popular type of short-term incentive is a bonus plan, with nine out of 10 private companies saying that is the case.

“Variable pay is playing an increasingly prominent role for all organizations striving to link employee rewards with bottom line results,” said Jim Stoeckmann, compensation practice leader for WorldatWork, in a press release. “We can expect to see pay practices focus more heavily on linking pay to performance in the near future.”