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Designing Successful Incentive Plans

Performance-driven incentive plans is your answer to assuring your company's goals while motivating employees

By Ron Bates

Very few programs can drive the success of a company than a well designed and implemented performance-driven incentive plan. The entire organization is focused on the measurements that management has identified and well communicated. To create an incentive plan that truly drives performance, managers need to keep in mind several key parts.

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    Performance-driven incentive plans work best when management has invested the time and energy to create a business plan that defines where the company is heading and how its going to get there. If you need assistance developing your plan, you may want to look at getting outside assistance. Some resources may be your Chamber of Commerce, local universities or colleges, or consultants. Be prepared to spend time even with outside resources doing some work for you. It will be your plan so you want them to understand your business, your customers, and most importantly ≠ your vision of the future.

    You also need to compare your current pay scales with those of other local/regional businesses. This information will be very important in designing your incentive plan. The better designed plans work from the base salary that serves as the anchor in total compensation planning, rather than the end result. You need to build your incentive program from a rational base pay foundation, using specific and appropriate data.

    Develop Clear Performance Goals

    One of the most important ingredients in designing an incentive plan is setting clear goals for employees. The goals need to be:

    1. Simple;
    2. Supported by valid information;
    3. Monitored by strong controls; and
    4. Quantifiable.

    Past results have shown that if you focus on a few measures (no more than 3 to 5), you have much better results. Your team needs to analyze past results and focus on the key factors that will give you the best returns.

    A simple example may be that your customers value on-time delivery of your product. You investigate you current performance and find that over the past two years your on-time delivery performance has been 62% and 66% respectively. One of your goals may be exceeding on-time delivery on 80% of the jobs going through your shop this year.

    Remember, each year you can raise the bar of the performance measure or change the measurable goals. Also remember that the closer you get to perfection (100%) the more difficult it is to make incremental changes. Itís much easier to correct problems that will get your business from 65% on time delivery to 85% on-time delivery than it is to move from 95% to 97%.

    The number one reason these plans fail is that there is too little involvement from all levels of the organization. Employees from all levels of the organization should participate, including identification of performance criteria. It will build trust with employees. It makes the plan come alive and makes it credible to everyone. You will see increased buy-in from all employees if you involve every level of the organization.

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    Reward Employees

    The plan must be fair to employees if it is to be successful. It must be both internally equitable and externally competitive. The reward must be large enough to be discernible and valid to employees. The goals must be easily understood and communicated. The program must also deliver what is promised, on time and fairly. The timing of incentive payments should be as close as possible to the qualifying event. This increases the motivational value of the plan to employees as well.

    A successful plan will set total cash compensation (base pay plus incentive payment). The compensation plan must be aligned with total rewards and strategic objectives. Any incentive payment must be directly tied to performance criteria achievement. Base pay should be adjusted for cost of living incremental changes, market adjustments, as well as changes in the major duties/responsibilities of an employee.

    Reward the Company

    The plan should be self-funding. The value added by the employees must flow to the bottom line in the form of additional profits or lower costs for the company. To be fair the company should be relatively profitable when the program is initiated. You will need to have some level of payout the first year not to lose credibility. The plan should be designed to protect the company against windfall payments as well.

    There is a reward to the company as well through shifting to total cash compensation using incentive based pay. Increase base pay and it is an annuity payment to employees. Using other types of plans with incentives, you are rewarding for results. After a few years you can see savings while remaining competitive in the market place for talented, motivated employees.

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    A well-designed and executed incentive program can improve the organizationís bottom line. Happier and richer employees and managers bring about increased productivity, customer service and on-time performance, among other measurable benefits.

    Clear Communication

    For some business owners this is the most difficult part of the program. It requires open and honest communications about their business and current financial situation. To be successful, the plan must describe the starting point, the objectives of the plan, and the anticipated results. Employees are not going to wait a year to hear the results of the plan. Managers/Owners need to make a commitment that they will provide information at least monthly to employees to allow them to see the results of their efforts.

    There is an old adage in manufacturing ≠ what you measure gets noticed, what you measure and communicate becomes important, and what you measure, communicate and reward gets done.

    Submitted by:

    Ron Bates

    R Bates & Associates Recruitment and Human Resources Consulting Services for the Sign Industry

    Voice: 757-890-0250 Email: Fax: 757-890-0357

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