Editor's Note: Are you rolling into the New Year on autopilot? Not so fast, says Chuck Csizmar, in this Classic cautionary post.
A new business year brings with it both the end and the beginning of the company’s annual management incentive plan cycle. While the left hand is busy processing performance assessments and award payouts the right hand is getting ready to launch the new cycle. In many companies this fresh start becomes an automatic activity, an administrative process not given much thought past doing what they did last year, and even the year before.
Here We Go Again
Perhaps instead of a rubber stamp now might be a good time to review the design, communication, administration and payment history of your annual management incentive plan and consider breathing some new life into it. Because if left on autopilot too long it’s surprising how many extra names get added to the incentive-eligible rolls, adding significant cost without proper review.
Eventually senior management will notice the ballooning costs and clamp down, either by reducing eligibility in a broad-based fashion, and /or by reducing incentive payment opportunities. You don’t want to get to this point.
Has your company made too many people eligible for the incentive program? Take a quick look at a 3-year growth curve of positions / employees being included. Would you consider them all deserving? Is someone making that call, or does title or grade designation become the sole deciding factor? Can you explain the ROI for the growing total in management incentive pay?
Employees deemed eligible for an incentive should have a line of sight between their performance against measureable objectives and corresponding incentive payments. If they don’t, what are you rewarding? Your plan shouldn't be a profit-sharing scheme, where eligible employees light a candle in the window and hope that the company does well.
Companies typically use the “manager” title as an eligibility cutoff, but perhaps what you name a position shouldn't be the sole criteria. There are those whose responsibilities include managing people, versus other individual contributors who manage a budget, or a non-staffed function, or a specific responsibility.
Using a grade designation can have its own problems; is everyone in a grade automatically eligible, and if not how do you differentiate between positions, when the company has already deemed all of similar (graded) value? Slippery slope here.
If you’re suffering from title inflation and have granted puffed-up titles for certain employees, are your Managers actually managing at all, or are they only supervising or are only technical experts with a bigger title?
Have a care that your pay-for-performance management incentive program doesn’t evolve into an entitlement program.
It's Time; Where's My Payment?
Something else to look at is whether the incentive award is actually at risk. How many of your eligible employees don't receive an award each cycle? If practically everyone receives an award, perhaps instead of an incentive plan what you have is a delayed compensation plan; managers put in their twelve months and then expect a bonus payment. I have clients in Europe where at least a portion of a manager's annual incentive is guaranteed.
Does your incentive program require behavior above and beyond, with individual objectives linked to broader company goals? Or are your objectives created at the end of the cycle, simply to comply with some HR assessment form that they must complete?
At the lower limits of eligibility companies may offer a 5% incentive target. However, that low a reward opportunity isn't a carrot at all. You won’t change behavior, never mind get anyone’s attention, so why bother? If behavior isn’t going to change, if you’ll get the same performance as before, but now for an additional cost, what's your investment return?
Now is the time to review the effectiveness of your annual management incentive plan and suggest improvements to increase effectiveness and provide more "pay for performance." Once the current payment processing cycle is complete the pressure will be on to roll-out the 2016 program. At that point the die will be cast for another year.
It will be too late. Your EASY button will have become your $ THROWAWAY button.
Chuck Csizmar CCP is the 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 clowder of cats.
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