Ever hear about a company with a profit-sharing plan in place for the past ten years, but no one has ever gotten paid? How about the company that only mentions their profit sharing plan twice per year: once at the start of the year when the profit target is set, and then at the end of the year when everyone finds out the results? Even worse, how about the company with a profit sharing plan that doesn’t ever share the profit information with their employees!
This is not to make fun or ridicule these family businesses. Incentive compensation, whether at the individual or corporate level, is indeed tricky. If we make the assumption that incentive compensation should be highly motivational, however, most owners’ plans miss the mark.
What’s missing at most family businesses is meaningful small incentives that will lead the company to enhanced profitability, and hence, the opportunity to actually receive annual profit sharing. Think of these as smaller, more temporary programs that will help you achieve your profit goal. In a well-designed small incentive plan, you will build teamwork, improve communication, instill the desire and expectation to win, focus everyone on winning together, not competing with each other, and reinforce sound business principles and training. The objective, however, is to permanently change the way something is done in your business for the better. The steps involved are:
1) Set a business target to be achieved that will enhance the company’s profitability. This target must be simple and easy to understand and track.
2) Identify who impacts the target and therefore should be eligible for the incentive.
3) Determine a time-frame to achieve the target goal (usually one to six months).
4) Decide on prizes for winning. These should include non-cash prizes.
5) Design a way to measure progress towards the target.
6) Work towards the target.
7) Evaluate the results.
When you’ve come up with your first exciting incentive, use the following checkpoints to be sure your incentive plan is on target:
Everyone eligible for the incentive can affect the target.
Everyone has a chance to get the incentive.
Rules are clear and simple.
Results are easily measured and scored.
There is a frequent way to check progress against the target (for constant reinforcement).
Competition is against the problem, not other participants.
Scoring rewards positive outcomes, rather than penalty scoring.
Limited duration, or early round winners.
Prizes encourage participation, not competition.
Prizes reward performance, not just motivate performance.
The target is meaningful to the company’s profitability.
Scorekeeping responsibility has been assigned to an individual who also settles disputes if they arise.
Promotes understanding of business principles.
Promotes long-term structural change.
If your incentive passes these criteria, congratulations and get started! If not, just try again. Here are the most common mistakes to avoid during incentive design:
• No context with the big picture or doesn’t provide a true understood benefit to the company.
• People don’t know who’s eligible or why.
• Too much emphasis on winning and better prizes rather than the business good.
• Conflict between departments. Achieving the target actually hurts or burdens another area of the company.
• Begin an incentive program and then forget to hype it or try to sustain it over too long a period of time. People lose interest.
• Confusion about the difference between a business target and stand-alone incentive programs. For instance, you pay $20 for a new account, but your target is $100,000 in new customer gross profit this quarter.
• Unintentional design of negative outcomes. For instance, winner gets a cruise, anyone at the next level gets a weekend trip, 3rd level gets dinner, 4th level gets to keep their job, and 5th level loses their job!
Now that you have the do’s and don’ts, let’s put it all into a practical context with a request that came into Meridian. This owner called because he wanted an incentive plan for his collections person.
The first thing we asked him was why did he want an incentive plan for this person? Would it be more appropriate to give this person a salary increase? The owner replied that what he really wanted was to reduce the dollar amount he had in 90-plus day accounts. So, our next logical question was about those accounts. Had he profiled those accounts to see how long they had been with his company before they slowed down? Guess what? He found out that most of them had payment problems right from the first day! So, his problem is not slow accounts, it’s bad credit decisions! No matter how wonderful an incentive he set up for his collections person, she would likely never earn it because these accounts had no intention of paying from day one!
