Successful Incentive Plans

In order to be trulymotivational, your compensation system must include an incentiveplan with these five characteristics:

  1. Fair
  2. Understandable
  3. Guaranteed Payout
  4. Significant Payout
  5. Payouts Linked to Measureable Improvements

1. Your plan must be fair.

Your incentive plan must be equitable to all parties.  Otherwise, it loses all of its incentive for the employees or it gives all of the financial gain to them.  Neither situation is desirable.  The bonus plan must allow the plan participants to enjoy the fruits of their effort for multiple years.  If your plan uses this year's performance as the baseline for next year's, your plan won’t have an impact within three years.  At that point, the effort required to obtain improvements will be greater than the possible financial gain to those being expected to put forth the effort.

The plan should encourage teamwork by rewarding all individuals directly or indirectly involved with the improvement.  The criteria for earning the bonus must be reasonable. Many companies overlook the importance of an incentive tied to the whole team. While individual performance must be measured, make sure your not creating overly competitive silos. It's important that focus is on the overall company performance as well.

The improvements must be achievable.  You must provide your employees with the tools, information, and opportunity to perform at a wiser and higher level.  That includes the authority to change work processes and the time to analyze, design, and implement the solutions they dreamup.  Bear in mind that some improvements will be driven by betterwork effort, others by smarter approaches, some by improved planning and communication, and several from vastly improved teamwork.


2. Your plan must be understandable.

Keep your incentive plans simple.  Few people can master the detailed workings of a complex bonus plan.  Unless your employees can understand how the improvement results translate into bonus pay, you will not receive any gains.  Without line-of-sight from their efforts to their paychecks, employees will not be motivated to raise productivity.

You must use a plan that can be easily explained and understood.  Unfortunately, "easily taught and understood" eliminates many of the more popular incentive programs.  If it takes you more than 45 seconds to explain the basics of the plan, your plan is too complicated.  You should be able to explain your plan's approach in one sentence.  For example: "We share 10% of quarterly company profits evenly with all employees based on their hours worked during the quarter."


3. Your plan must have a guaranteed payout.

If your workers doubt you will come through with their bonus pay, your incentive plan is destined for failure.  It will not provide the motivation and deliver the results you are hoping for.  The payout must be exactly according to plan, no matter how ugly your business results or how big the payout.  You must make the payout promised, no matter what.

Obviously, that also means your plan's design must account for severely unpleasant outcomes and it means you must set your employees' expectations regarding the circumstances that control the payout.  They must understand the plan's qualifying conditions.  If you fail to communicate the link between performance and payout prior to making a lower-than-expected payout, your employees will believe you cheated them out of a justly earned bonus.  Once they believe you can't be trusted, the plan's ability to motivate goes down the drain.


4. Your plan’s payout must be significant.

The payout must be large enough to get your workers' attention.  Workers make rational trade-offs between hard work and the money created by it.  You probably see higher labor productivity as job security but your workers will not buy into that. They want money, and the more the better.

If the productivity gains reduce overtime pay, you will have difficulty getting your field workers to pursue the gains passionately.  You will be asking them to give up a large sum of overtime money for a small bonus. Most field workers embrace overtime pay, up to about 15 hours a week.  Your best strategy is to wean them off overtime except for rare and dire situations.  After successfully eliminating overtime, then implement your bonus plan. Trust us on this one. Getting rid of overtime is the best financial gift you can give your company.


5. The payout must be linked to measurable improvement.

The bonus should not be made unless earned.  The bonus system should pay when productivity or profit improves.  Paying for missed performance targets undermines the purpose of the plan. The size of the payout should be tied directly to the magnitude of the improvement.  The standards against which future performance will be benchmarked need to be legitimate.  The measured improvement must not be the result of a poorly set standard.  This means you have to know your labor productivity, job costs, and/or company profit prior to finalizing and implementing your new bonus plan.

Everyone’s plan is unique, but if you’d like some ideas or would like a Next Level Consultant to review your current plan contact us.

 In our next post we’ll take a closer look at profit sharing.

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