8 min read •

Here’s a frustrating reality most companies face: your best employees aren’t performing at their full potential.

It’s not because they’re lazy or unmotivated. It’s because they don’t see a clear connection between exceptional performance and exceptional rewards. They show up, do good work, and get the same annual raise as everyone else. So why would they go above and beyond?

This is where performance incentive plans—particularly Long-Term Incentive Plans (LTIP) and Short-Term Incentive Plans (STIP) – change everything. When done right, they transform your good employees into top performers and your top performers into unstoppable drivers of growth.

Why Generic Bonuses Don’t Work

Let’s be honest: most company bonuses are terrible at motivating performance.

Here’s what typically happens: At the end of the year, everyone gets a “performance bonus” that’s loosely tied to some vague criteria. Your top performer who crushed every goal gets 8% of salary. Your mediocre employee who did the bare minimum gets 5%. The difference? About 3,000-5,000 SAR for a mid-level employee.

Is that enough to drive exceptional performance? Not even close.

The problem with generic bonuses:

• They’re too small to meaningfully impact behavior
• They come too late (annual bonuses feel disconnected from daily work)
• They’re not tied to clear, specific goals
• Everyone gets something, so they feel like entitlements, not rewards
• They don’t differentiate between good and exceptional performance

Performance incentive plans solve all of these problems.

What Are Performance Incentive Plans?

Performance incentive plans are structured reward systems that tie compensation directly to measurable business outcomes. They come in two main flavors:

Short-Term Incentive Plans (STIP)

STIPs reward employees for achieving specific goals over a shorter period – usually quarterly or annually. They’re designed to drive immediate results and maintain momentum.

Long-Term Incentive Plans (LTIP)

LTIPs reward employees for sustained performance and long-term commitment. These programs typically span 2-4 years and are designed to retain top talent while aligning their interests with the company’s long-term success.

How Performance Incentive Plans Actually Work

Let’s break down the mechanics of a well-designed incentive plan:

Step 1: Define Clear, Measurable Goals

This is where most companies fail. Goals must be:

• Specific: Not “improve sales” but “increase sales by 25% in Q2”
• Measurable: Tied to numbers you can actually track
• Achievable: Challenging but realistic
• Relevant: Aligned with company priorities
• Time-bound: With clear deadlines

Step 2: Establish Reward Structures

The reward must be significant enough to motivate. For STIPs, think 5-15% of salary. For LTIPs, think 20-50% of annual salary paid out over the vesting period.

Many companies use tiered structures:

Step 3: Track Progress Transparently

Employees need to see exactly where they stand at all times. Use dashboards, regular check-ins, and real-time metrics. The more visible the progress, the more motivated people stay.

Step 4: Pay Out Promptly

For STIPs, pay as soon as the period ends. Waiting months to process bonuses kills motivation. For LTIPs, communicate vesting schedules clearly so employees know exactly when they’ll receive rewards.

Step 5: Celebrate and Communicate

When someone hits their goals, make it public (with their permission). Recognition amplifies the impact of financial rewards. It also shows others what’s possible.

Real-World Example: Transforming Sales Performance

Let’s look at how a Riyadh-based company used performance incentives to transform their sales team:

The Challenge:
Sales team was hitting about 70% of quota on average. High turnover (35% annually). Low morale.

The Solution:
Implemented a dual incentive structure:

The Results After 18 Months:

• Average quota attainment jumped from 70% to 95%
• Top performers consistently hitting 120%+ of quota
• Turnover dropped to 12% (from 35%)
• Total revenue increased by 42%
• Employee satisfaction scores up 38%

“For the first time, our sales team had a reason to stay AND a reason to push harder. The STIP kept them motivated quarter to quarter, and the LTIP made them think about their future with us.”

— Sales Director, Riyadh Tech Company

Common Mistakes Companies Make (And How to Avoid Them)

Mistake #1: Making Goals Too Vague

Bad: “Improve customer satisfaction”
Good: “Increase NPS score from 45 to 60 by Q4”

Vague goals create confusion and disputes. Be specific.

Mistake #2: Setting Rewards Too Low

A 2% bonus won’t motivate exceptional performance. If you want exceptional results, the reward needs to feel exceptional. Think 10-20% of salary for STIPs, 30-50% for LTIPs.

Mistake #3: Creating Individual Goals in Team Environments

If success requires teamwork, don’t incentivize individual competition. Use team-based or hybrid goals that encourage collaboration.

Mistake #4: Changing the Rules Mid-Game

Nothing kills trust faster than moving goalposts. Once you set the targets, stick to them. If adjustments are needed, do it for the next cycle.

Mistake #5: Ignoring Non-Financial Recognition

Money matters, but so does recognition. Celebrate wins publicly. Give top performers visibility with leadership. Make them feel like the stars they are.

Designing Your Performance Incentive Plan

Ready to build your own plan? Follow this framework:

1. Start with Your Business Goals

What are your top 3-5 priorities this year? Revenue growth? Customer retention? New product launches? Your incentive plan should drive those outcomes.

2. Choose the Right Mix

Most companies benefit from both STIPs and LTIPs:

• For individual contributors & specialists: STIP-heavy (70/30)
• For managers & team leads: Balanced (50/50)
• For executives & senior leaders: LTIP-heavy (30/70)

3. Set Clear Performance Tiers

Use threshold, target, and stretch goals with corresponding reward levels. This gives employees something to aim for at every level.

4. Build in Transparency

Everyone should understand:

• Exactly what they need to achieve
• How their performance is measured
• Where they currently stand
• When they’ll receive rewards

5. Plan for Administration

Don’t underestimate the operational work. You’ll need systems to track performance, calculate payouts, manage vesting schedules, and handle compliance. Partner with platforms that automate this complexity.

The ROI of Performance Incentives

Let’s talk about cost. Yes, performance incentive plans require investment. But the return is substantial:

When you factor in the cost of turnover (150-200% of salary per employee lost), the ROI becomes crystal clear.

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