How to Test Your Incentive Plan



Imagine a company where everyone on the payroll is engaged and committed. Where employees are considered trusted partners rather than hired hands. Where everyone has a chance to learn about the business, to contribute to its success, and to share in the wealth they help create.

What’s clear is that such a company would likely be highly profitable, a leader in its market. It would attract and keep the best people. And it would be something everyone could be proud of. As we rebuild the American economy after the coronavirus pandemic, it’s the kind of company we need.

We’ve spent a couple decades helping companies turn this idea into something real–the stories are captured in our forthcoming book, Partners on the Payroll by Bill Fotsch and John Case.  We want to share some of the most important insights of employee partnership in these pages. And as companies enter the planning season, incentives become especially topical.

When you implement employee partnership, or economic engagement, you are asking people to change the way they do things. Tracking key numbers helps people understand the fundamental economics. Figuring out how to move the needle deepens that understanding. It gives your employees the experience of working together to help the company succeed. Right there is the ultimate “why” for anything they do.

But since business is an economic institution (its goal is to make money), partners have a right to share in the wealth they help to build. Nearly everyone wonders, What’s in it for me? A healthy incentive program answers that. It should also explain why.

And it shouldn’t just garner employee satisfaction; it should garner employee innovation.

If people know their job performance is linked to an incentive like a quarterly bonus, they’ll likely develop new ways to produce better results. They’ll naturally innovate to become more efficient–finding ways to finish work faster or improve quality without sacrificing cost. They’ll seek new approaches to better serve customers. In short, engaged employees live in a world of cause and effect. They understand how their actions contribute to the success of the entire venture. Incentive plans, by definition, are supposed to affect people’s behavior on the job, day in and day out.

While plenty of things can derail your incentive plan (many are detailed in our previous article), it isn’t hard to create a plan that fosters that ideal kind of partnership.

First, you’ll have to work with your employees, managers, customers, and financial statements to define your company’s issues. You’ll need to define the key performance metric, and you’ll have to begin tracking, broadcasting, and forecasting the company’s results on this metric. Then you get together with people and take the following steps:

Define the right group for the plan.

In smaller companies, the right group is usually the whole staff. In larger ones, it could be a branch or a functional unit, but be sure it includes everyone, support staff as well as front-line workers. Remember that business is a team sport.

Begin talking about the bonus plan with people in that group.

By now they should understand the key number. Do they also begin to see how they can affect that key number? Do they understand the effects on company financial performance if it moves in the right direction?

Next, draft up a plan.

A handy rule of thumb is to distribute one-third of the incremental gains to employees in the form of a bonus while retaining two-thirds for the company. But every firm is different, and you will have to determine what’s best in your own situation. A bonus where the incentive pool increases with every incremental gain in financial performance can lead to a very generous bonus indeed!

Spell out the details.

How much do we get and when do we get it? A few companies I have heard of pay everyone equally: they just divide up the bonus pool into same-size segments. But most companies I work with pay differential bonuses based on employees’ earnings, with everyone getting the same percentage of their base pay. Most make the payments every three months based on the quarter’s performance. Some reserve a portion of the quarterly bonus pool until year-end to make sure that the year’s results justify a payout.

A good test of an incentive plan is to look at the pool of money at the end of the year and ask yourself this: if you were given the opportunity to buy an insurance policy whose price was the incentive pool–and if you paid that premium only if you hit budget–would you buy that policy?

If the answer is no, keep working on the plan.

If yes, you’re moving in the direction of the company we imagined in the beginning. Employees at these organizations learned to think differently, to view themselves as partners in the business. They benefit economically. That money not only provides employees with more income and greater security; it also helps boost the prosperity of the communities these people live in. It’s just a small indication of the power of partnership.

One final word: it’s often said that nobody works for money alone, and that nobody is motivated by the prospect of more money. There’s a lot of truth in that. If you’re doing a job day in and day out, you may be motivated more by the demands of the work itself and the people you’re working with than by the prospect of financial gain. But people always like to win, and they like to feel that their efforts to help the company win are appreciated and rewarded. Nothing says “thank you” like several weeks’ worth of extra pay. And nothing encourages people to think like partners as much as knowing that they will be paid like partners.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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