If I asked you how to improve your company's EBITDA, would you be able to answer? Or if an employee asked you to explain why EBITDA is a sound measure of company progress, could you explain? Could you draw a line from an employee's decision about how to use his/her time on Monday to the health of your company's EBITDA?
Let's say you answer, "Yes," to all these questions, can you tell me how you feel about your company's EBITDA results last year? Are your proud, disappointed, wary?
I have no doubt that EBITDA is the right target measure for most companies to hang all or part of incentive plan funding on. Experienced financial advisors turn to it repeatedly. But is it a motivator? Will it cause the manager in shipping to make an effort to improve delivery times so this year's incentive plan is funded?
Most companies who use it in incentive plan design haul it out to employees once a year, and only once a year. Human Resources spells the acronym out in a PowerPoint presentation so no one can get mixed up -- earnings before interest, taxes, depreciation and amortization -- then everyone goes back to their desks, none the wiser.
I'm only bringing this up because over my career I have seen no company do any better with EBITDA -- or want to, when the question is posed. No one's ever tried to help employees picture a line of sight or go into any detail about why, given how the stock's been doing and the new product launch and, and, and, EBITDA is the best way for us to track our progress because . . .
Basically, the message always comes down to, "trust me," we need more earnings before interest, taxes, depreciation and amortization. Actually, if we even said that, it would be much clearer to the employee that what we usually cook up in incentive communications.
Can EBITDA be a motivator? I bet it can. We offer truckloads of advice on Compensation Cafe about how to design and implement an effective incentive plan, so there are lots of ways we can and should do things better. But this has to be one more example.
If we make all this fuss in incentive plans about whether the plan will be funded, and how much it will be funded, and then we create a version of smoke and mirrors with "EBITDA," what do you think that does to the rest of the incentive plan? It undermines its credibility and power as a motivator.
If you don't want people to think of their incentive as an annuity, think about this. Your goal doesn't need to be getting employees to understand Finance -- but it should be getting employees to feel that their incentive is an inducement to work more effectively. What in the world should they make of EBITDA? If it's so important, we should all understand a lot more about it by now.
Margaret O'Hanlon, CCP brings deep expertise to discussions on employee pay, performance management, career development and communications at the Café. Her firm, re:Think Consulting, provides market pay information and designs base salary structures, incentive plans, career paths and their implementation plans. Earlier, she was a Principal at Willis Towers Watson. Margaret is a Board member of the Bay Area Compensation Association (BACA). She coauthored the popular eBook, Everything You Do (in Compensation) Is Communications, a toolkit that all practitioners can find at https://gumroad.com/l/everythingiscommunication.
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