Does Your Incentive Plan Work?

Once management incentive plans are developed and implemented they tend to take on a life of their own, and like a perpetual motion machine may keep on ticking, doing what they do, perhaps long past their intended design and usefulness.

Perhaps that's where the phrase, "we've always done it that way" originated.

So it's worth checking in every now and then.  Kicking the tires.  When is the last time that you reviewed the effectiveness of your management incentive plan?  To see whether the intent of the plan was still being delivered?  Is it still performing to design (risk - performance - reward) specifications, part of your pay-for-performance strategy, or is it simply an administrative reward processing machine?

What does it take to change behavior?

For example, is one of the goals of your incentive program to change behavior?  To encourage and reward performance that's above and beyond normal expectations?  That's why it's called incentive.   Or else why pay for what would have happened anyway? 

That would be what is called "delayed compensation", as in "it's been 12 months, where's my check"? Such a scenario is not pay-for-performance - but happens all too often, just the same.  With luck your plan focuses on a win-win strategy; that of first achieving company goals, which in turn generates a reward for the employee(s).

So you want to change behavior.  You want to light a fire under participants and get them motivated to achieve their quantifiable, measureable objectives.  So how much target incentive would it take to have an employee focus their attention for the entire performance year on achieving their objectives?

If you said any number lower than 10% I'd suggest you save your money and don't bother.  Because not enough money is in play to gain an employee's attention and hold it for an entire year.  Behavior modification will not take hold and root.  What you'll get instead is the same performance you would have gained without an incentive, only your compensation costs would have risen.

For employees clamoring to be made incentive-eligible, even a measly 5% target incentive is an attraction, especially for managers trying to do whatever it takes for their employees.  However it would be incumbent on the requesting manager to explain upward what the employer would gain for that increased cost of labor.  Because if you can't show the ROI for the cost increase, your proposal would face a steep uphill battle.

Take a chance, anyone?

There's another way to make the sale, of course, but it's a strategy rarely taken.   You could lower base salaries a bit for those newly eligible for an incentive program, and counter-balance that hit with the opportunity to earn a great more through the incentive scheme.  Most of the time employees would come out ahead by the end of the year (sometimes a great deal), but there is a risk.

And therein lies the rub.  Many affected employees would raise such a howl of outraged indignation that your ears would bleed.  When pay-at-risk is a reality it often doesn't go over well in certain quarters.  The demand instead would be for additive compensation, not the uncertainty of true variable pay.

Have a care to avoid that trap.

So as FY12 nears a close and plans are being finalized for FY13, have a look-see at your management incentive plans.   Do they really incent?  Do they provide rewards for achieving company objectives?  And while you're at it, check whether those targeted rewards are indeed a motivating tool, or are you planning to give away money for the same performance you could have gained for free?

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a brood of cats.

Creative Commons image courtesy of Enokson's Photostream

Comments

[Dan Walter]

Testing and verification of efficacy may be the single most important aspect of incentive plans. One of the big illusions I see is when companies are doing well they credit their incentive plans. Often they don;t check to see if the incentive plans and the company success are actually aligned, or if they even impact each other.

Not testing your incentive plans is like running a business without checking results, or cooking a meal without seeing how it tastes in the end. The evaluation and evolution of a plan at least annually, and more often if the plan pays out on an annual basis, is key.

Thanks for the reminder.

[Jacque Vilet]

Good points Chuck. If you put more bonus at risk -- the ones who think the "glass is half empty" would howl. The ones you want on your team are ones that rub their hands with glee and see the "glass half full"!

[Chris]

Interesting ideas and unconventional thinking regarding lowering base salaries for new folks.

I wonder though, does money (comp) really have the ability to change/modify behaviour, or can it simply reinforce a behaviour change that is primarily driven by other non-comp methods?

[John A Bushfield]

I like it. I've always believed that variable comp is under-used in corporate america, and that it should be spread across the entire employee population, not just managers.

I also know that variable comp is miss-used; many hiring executives use variable comp as an extension of base salary when trying to lure candidates, which contributes to the problem you describe.