Incentive Compensation Options

Recent human resources surveys indicate that most companies use some sort of incentive plan to motivate employees. The most popular reward programs include bonus systems, profit-sharing and merit pay. The theory is simple and compelling.

Recent human resources surveys indicate that most companies use some sort of incentive plan to motivate employees. The most popular reward programs include bonus systems, profit-sharing and merit pay.

The theory is simple and compelling. Employees are more productive if part of their compensation is tied to the company’s business objectives. They will direct their efforts toward hitting goals, and they are more inclined to tackle whatever gets in the way.

The numbers tell the story. You can get a substantial return for your investment in an effective incentive compensation program. The Consortium for Alternative Rewards Strategies studied 733 companies and found financial rewards averaging $2.22 for every dollar of payout.

Familyowned businesses are faced with unique challenges when it comes to developing equitable incentive plans for employees. These plans are inherently subject to heightened scrutiny when interpersonal family dynamics are involved. Perhaps even greater scrutiny comes from those who fall outside the family bloodline.

The good news is that your business has several excellent options available these days. You can pick and choose from timetested programs to create a customized system that generates specific results for your unique business objectives.

Gain Sharing Vs. Goal Sharing

Gain Sharing, in its simplest form, rewards employees based on a company’s performance. These plans are companywide, with a uniform measurement system generally based on salary.

A typical gain sharing scenario: Company ABC has declining gross profits. The objective is to increase profits by a certain percentage. Company ABC puts a plan into place that promises employees that gross margin increases above 15 percent will be shared 50/50 with employees.

Goal Sharing, in contrast, rewards employees for meeting specific goals. These goals are not necessarily based on the bottom line and may include quality, service and job performance. Goal Sharing can be developed at a team level or individual level.

Within a Goal Sharing scenario, Company ABC may set a quality goal for a line crew. If that goal is met, all on that team are rewarded accordingly.

Rewarding Individuals

There are a number of great tools available for creating compensation plans for key employees. Creating individual goals and rewarding them accordingly ensures a “level playing field.” The Balanced Scorecard System is one such example.

This system considers an individual’s role in helping a company meet its shortterm objectives and longterm goals. These items should be clearly expressed in the company’s strategic business plan.

What does that person need to achieve in order to ensure the company’s success? Both the employee and the executive management team should contribute to the scorecard—agreeing on goals, timelines and a measurement system that is equitable and achievable.

Team Plans

Creating incentive programs within a team environment has several key benefits. Making goals contingent on the efforts of a team discourages “freeriders” and capitalizes on the cohesion and perceived pressure from a group.
There are several factors that catalyze success in implementing a team program. First, you must make the incentive worthwhile and empower team members to meet attainable goals. Evaluation and rewards must consider the difficulty of the assignment and the probability of failure. People will not take risks if they are penalized for taking on difficult assignments.

It is also important to reward early and often, linking rewards to different phases of projects. This reinforces shortterm accomplishments without losing sight of long-term goals. You should also consider reducing the hierarchies that create status and power differentials. Flatten or eliminate job titles for purposes of that goal.

Lastly, you should consider rewarding teams through lumpsum payments for landmark accomplishments. Be sure to recognize individual excellence by identifying and rewarding key contributors through group nomination, using cross functional groups for the evaluation of nominees.

Keys To Implementation

Don’t expect instant success. The most successful incentive plans involve a longterm process. Ideally, they are rooted in a comprehensive strategic business plan that clearly defines the company’s longterm goals and shortterm objectives.
Incentive plans often fail when there is not a business case for the plan. They also fail when they don’t receive ongoing enthusiasm and support from executive management.

Companies must carefully evaluate whether or not a given incentive plan is worth the effort. What is the payback ratio (change in net profit divided by total payout)?

Additionally, there is a psychology that underscores bonus systems. If the payout is too large, employees worry about things beyond their control. If the payout is too small, employees may determine there is too much competition, therefore it is not worth the effort.

It is vitally important that incentive programs employ very tangible measurable and visible objectives. You may want to assign points or use a weighting system that ensures complete objectivity. It is also wise to publicize progress toward a goal. Make a team or goal “scorecard” visible for everyone affected, and give feedback freely.

In conclusion, the most successful incentive programs include two major factors. Goals are directly connected to company objectives, and those who stand to gain from the program are involved in its development.

Reprinted with permission from The Family Business Report sponsored by the Goering Center at the University of Cincinnati College of Business Administration.