Recent human resources compensation surveys indicate that most companies use some sort of incentive plan to motivate employees. The most popular reward programs include bonus systems, profit-sharing and merit pay.

The the­o­ry is sim­ple and com­pelling. Employ­ees are more pro­duc­tive if part of their com­pen­sa­tion is tied to the company’s busi­ness objec­tives. They will direct their efforts toward hit­ting goals, and they are more inclined to tack­le what­ev­er gets in the way.

The num­bers tell the sto­ry. You can get a sub­stan­tial return for your invest­ment in an effec­tive incen­tive com­pen­sa­tion pro­gram. The Con­sor­tium for Alter­na­tive Rewards Strate­gies stud­ied 733 com­pa­nies and found finan­cial rewards aver­ag­ing $2.22 for every dol­lar of payout.

Fam­i­ly owned busi­ness­es are faced with unique chal­lenges when it comes to devel­op­ing equi­table incen­tive plans for employ­ees. These plans are inher­ent­ly sub­ject to height­ened scruti­ny when inter­per­son­al fam­i­ly dynam­ics are involved. Per­haps even greater scruti­ny comes from those who fall out­side the fam­i­ly bloodline.

The good news is that your busi­ness has sev­er­al excel­lent options avail­able these days. You can pick and choose from time test­ed pro­grams to cre­ate a cus­tomized sys­tem that gen­er­ates spe­cif­ic results for your unique busi­ness objectives.

Gain Sharing Vs. Goal Sharing

Gain Shar­ing, in its sim­plest form, rewards employ­ees based on a company’s per­for­mance. These plans are com­pa­ny­wide, with a uni­form mea­sure­ment sys­tem gen­er­al­ly based on salary.

A typ­i­cal gain shar­ing sce­nario: Com­pa­ny ABC has declin­ing gross prof­its. The objec­tive is to increase prof­its by a cer­tain per­cent­age. Com­pa­ny ABC puts a plan into place that promis­es employ­ees that gross mar­gin increas­es above 15 per­cent will be shared 50/50 with employees.

Goal Shar­ing, in con­trast, rewards employ­ees for meet­ing spe­cif­ic goals. These goals are not nec­es­sar­i­ly based on the bot­tom line and may include qual­i­ty, ser­vice and job per­for­mance. Goal Shar­ing can be devel­oped at a team lev­el or indi­vid­ual level.

With­in a Goal Shar­ing sce­nario, Com­pa­ny ABC may set a qual­i­ty goal for a line crew. If that goal is met, all on that team are reward­ed accordingly.

 Rewarding and Individuals Compensation

There are a num­ber of great tools avail­able for cre­at­ing com­pen­sa­tion plans for key employ­ees. Cre­at­ing indi­vid­ual goals and reward­ing them accord­ing­ly ensures a “lev­el play­ing field.” The Bal­anced Score­card Sys­tem is one such example.

This sys­tem con­sid­ers an individual’s role in help­ing a com­pa­ny meet its short term objec­tives and long term goals. These items should be clear­ly expressed in the company’s strate­gic busi­ness plan.

What does that per­son need to achieve in order to ensure the company’s suc­cess? Both the employ­ee and the exec­u­tive man­age­ment team should con­tribute to the scorecard—agreeing on goals, time­lines and a mea­sure­ment sys­tem that is equi­table and achievable.

Team Plans

Cre­at­ing incen­tive pro­grams with­in a team envi­ron­ment has sev­er­al key ben­e­fits. Mak­ing goals con­tin­gent on the efforts of a team dis­cour­ages “free rid­ers” and cap­i­tal­izes on the cohe­sion and per­ceived pres­sure from a group.
There are sev­er­al fac­tors that cat­alyze suc­cess in imple­ment­ing a team pro­gram. First, you must make the incen­tive worth­while and empow­er team mem­bers to meet attain­able goals. Eval­u­a­tion and rewards must con­sid­er the dif­fi­cul­ty of the assign­ment and the prob­a­bil­i­ty of fail­ure. Peo­ple will not take risks if they are penal­ized for tak­ing on dif­fi­cult assignments.

It is also impor­tant to reward ear­ly and often, link­ing rewards to dif­fer­ent phas­es of projects. This rein­forces short term accom­plish­ments with­out los­ing sight of long-term goals. You should also con­sid­er reduc­ing the hier­ar­chies that cre­ate sta­tus and pow­er dif­fer­en­tials. Flat­ten or elim­i­nate job titles for pur­pos­es of that goal.

Last­ly, you should con­sid­er reward­ing teams through lump­sum pay­ments for land­mark accom­plish­ments. Be sure to rec­og­nize indi­vid­ual excel­lence by iden­ti­fy­ing and reward­ing key con­trib­u­tors through group nom­i­na­tion, using cross func­tion­al groups for the eval­u­a­tion of nominees.

Keys To Implementation

Don’t expect instant suc­cess. The most suc­cess­ful incen­tive plans involve a long term process. Ide­al­ly, they are root­ed in a com­pre­hen­sive strate­gic busi­ness plan that clear­ly defines the company’s long term goals and short term objectives.
Incen­tive plans often fail when there is not a busi­ness case for the plan. They also fail when they don’t receive ongo­ing enthu­si­asm and sup­port from exec­u­tive management.

Com­pa­nies must care­ful­ly eval­u­ate whether or not a giv­en incen­tive plan is worth the effort. What is the pay­back ratio (change in net prof­it divid­ed by total payout)?

Addi­tion­al­ly, there is a psy­chol­o­gy that under­scores bonus sys­tems. If the pay­out is too large, employ­ees wor­ry about things beyond their con­trol. If the pay­out is too small, employ­ees may deter­mine there is too much com­pe­ti­tion, there­fore it is not worth the effort.

It is vital­ly impor­tant that incen­tive pro­grams employ very tan­gi­ble mea­sur­able and vis­i­ble objec­tives. You may want to assign points or use a weight­ing sys­tem that ensures com­plete objec­tiv­i­ty. It is also wise to pub­li­cize progress toward a goal. Make a team or goal “score­card” vis­i­ble for every­one affect­ed, and give feed­back freely.

In con­clu­sion, the most suc­cess­ful incen­tive pro­grams include two major fac­tors. Goals are direct­ly con­nect­ed to com­pa­ny objec­tives, and those who stand to gain from the pro­gram are involved in its development.

Reprint­ed with per­mis­sion from The Fam­i­ly Busi­ness Report spon­sored by the Goer­ing Cen­ter at the Uni­ver­si­ty of Cincin­nati Col­lege of Busi­ness Administration.

Ref­er­ence:

http://www.productionmachining.com/columns/incentive-compensation-options