The pending start of 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. However, in many companies this fresh start has become 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 opportunity 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 costs coming through the back door -without proper review.
Eventually senior management will notice the ballooning costs and take steps to clamp down, perhaps by reducing eligibility in a broad-based fashion, and/or by reducing incentive payment opportunities. You don’t want to get to this point.
So, kick the tires of your program a bit. Over time, has your company increased the number of eligible employees/titles for the incentive program? Take a quick look at a 3-year growth curve of those being deemed eligible. Would you consider each of them deserving on an annual incentive opportunity? Is someone in your organization making that decision, or does title or grade designation become the sole criterion? Can you explain the ROI for the growing total now included in management incentive pay?
Employees deemed eligible for an incentive program should have a line of sight between their performance expectations against measurable 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 often use the “manager” title as an eligibility cutoff, but perhaps what you name a position shouldn't be the sole criterion. 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.
Alternatively, 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 similar (graded) market value? Slippery slope here.
If you’re suffering from title inflation and have granted puffed-up titles for certain employees, are your managers managing at all, or are they only supervising or are in fact technical experts gifted 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 itself is ever at risk. How many of your eligible employees fail to receive an award each cycle? How many receive only 25% of target, or even 50%? If practically everyone receives a large portion of their targeted award, perhaps instead of an incentive plan what you have is a delayed bonus compensation plan; affected employees put in their twelve months and then expect a check at year end. I have had clients in Europe where at least a portion of a manager's annual incentive payment was guaranteed – regardless of individual or company performance.
Does your incentive program require behavior that is above and beyond the job description, with individual objectives linked to broader company goals? Or are those annual objectives created at the tail end of the cycle, simply to comply with some HR assessment form that they must complete?
At the lower limits of reward opportunity companies may offer a 5% incentive target. However, that low a reward opportunity isn't a carrot at all. It’s a “gimme.” You won’t change behavior, never mind get anyone’s attention for that small an amount, so why bother? If behavior isn’t going to change, if you’ll get the same performance as you would have gotten anyway, but now for an additional cost, where is 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 new program. At that point the die will be cast for another year.
It will be too late. Your EASY button will have become your cash 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.
Creative Commons image "ber-antem," by Dimaz Fakhruddiny
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