Solving the performance incentive puzzle

John Carroll

             It was the greatest thing they’ve ever done over there at your friend’s company. They found a way to improve their results by adding an incentive payment plan for the employees. Now you’re inclined not to reinvent the wheel and simply copy and paste the plan into your own business and watch as the increased revenues and profits roll in.

            First, you might want to get your foul weather gear because it’s about to rain on your parade. Perhaps the worst decision you’ll make this or any year is to import someone else’s incentive payment or bonus plan and put it to work for you. It’s certainly the worst decision you’ll make on behalf of your people who are trying to help you accomplish departmental and company objectives. Don’t do it. Don’t cave to the temptation that created and tested elsewhere means that it will work here.

 If you build it…

            The first thing you should know about performance-based incentive plans is that they need to belong to those who are participating in the plan. That doesn’t mean that you bring in the plan, present it and trust that your people, who want to make more money, will accept it, understand it fully, work within it and everything will turn up roses.

            The way that your people will own the plan in which they participate is that they’ll also participate in its design and creation. Yes, this will require more time than putting your friend’s plan into effect in your company. Yes, this will require a handful of meetings during which you or someone will explain some of the financial implications of what you’re trying to accomplish and why the status quo needs to be changed to achieve certain goals and objectives. Yes, this will require patience on your part and theirs since they, too, would rather just get the rules, start the plan and see more money in their checks.

 If they build it…

            By the time your people have answered the questions necessary to build a reasonably designed and structured performance incentive plan, they will indeed own it. They’ll also be ready for the test drive to see if it does as intended, both for the company and for them. Be ready for them to ask questions galore if they can’t see numbers reflecting how they’re doing in the area of focus.

            If they build it, there’s still no guarantee that it will work perfectly on its maiden voyage. It’s more likely that, with time and increased familiarity, there will be opportunities to revise and improve the performance-based incentive plan to cause or enhance the win-win outcome.

When building, answer these questions

            Three questions constitute the guiding steps in designing and creating a performance-based incentive plan. When these questions are asked in order and answered in the affirmative before moving to the next question, the plan has the best odds of accomplishing what it was created to do. Let’s look at the three questions and how they work in order and interactively:

1.     Does the plan promote greater productivity among its participants? At its core, a performance-based incentive plan should change some behaviors of those who would benefit from the plan. To get a clear and resounding yes to this question, it’s a good idea to dig into making sure that any proposed delivery of benefits (financial payout, personal time off, etc.) rises to the level of the desired change in behaviors. In other words, would your team members improve 20 percent or more on a dozen key performance indicators over a year for a financial reward of $5.00 per person? Likely, they wouldn’t. Conversely, would plan participants work on three areas of potential improvement over the course of three months for the opportunity to earn an additional $500? Even if you don’t get the full chorus of positive responses, you’re probably getting warmer and closer to yes. Despite the fact that we don’t have the money set aside just yet, we need to ask this question before we can delve into Questions 2 and 3.

2.     Does the plan generate sufficient incremental funds/profits to the company to cover the proposed rewards? Done well, the performance-based incentive plan should have a positive impact on the bottom line. We need to be able to connect changed behaviors with new dollars flowing to net profits before tax, as an example. Once we can do that, we can also begin to determine whether the company has to dig into its existing income to pay for the plan’s proposed rewards. This question addresses the issue of fairness to the participating organization and its owners. If the company is forced to finance the plan’s payouts with existing income and funds, it soon becomes unsustainable or at the very least a source of irritation and frustration for company owners. Plan designers who are about to be participants demonstrate their understanding of this fact when they say that they don’t want to bonus themselves out of their jobs.

3.     Is the plan perceived as fair among its participants? While the first two questions are much more focused on the formula of the incentive and what it will take to generate the funds that are to be used as rewards for behavior change, this one is all about the rules. Who will participate? As new team members arrive, how long before they’re eligible to participate? What about payouts? How does one qualify to receive the incentives, i.e., must the individual be employed by the company on the date of the payout? Other than separation from the company, how would one become ineligible for future payouts? The caution here is that plan participants would like to jump straight to this question without first addressing the first two. The best way to bring the discussion back to focusing on the first two questions in order is to remind participants that they must first define the way that they’ll generate the additional funds before turning their attention to distributing rewards fairly and equitably.

 What to expect

            Done well, this approach takes time, as noted earlier. Done well, this process also gives both participants and stakeholders the platform for discussing issues and opportunities near and dear to their respective hearts. Along the way, virtually anything under the sun can and often does come up in discussion. Issues that are parallel and not central to the process can and should be recorded and parked for attention and possible action later. Finally, done well, the steps shown here increase participants’ business literacy in small increments and over time. With repetition of measured results and repetition and reinforcement of the implications of those numbers, understanding increases and good things are more likely to happen in collateral areas of the business. 

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