Monday, March 26, 2012

Right Vs. Wrong Incentives

It's fairly common these days to find articles written by those who advocate increasing the eligibility of employee incentives.  Their recommendation is to push inclusion further and further down the organization's hierarchy.  The argument is that all employees affect a company's success, that every employee will chase the almighty dollar of variable pay, and that the opportunity for ever larger rewards will motivate them to do great things.  All of which would in turn deliver improved financial results for the company's bottom line.


And maybe it's not such a good idea after all.  Perhaps it's a bit of a crap shoot as to whether higher compensation costs (which would be a certainty) will result in improved financial gains (possible, but not guaranteed).   Let's take a look at the challenges to be faced when you consider a broader eligibility for your annual incentive program.

What's The Plan?

Start with a re-examination of the basics.  What do you consider an incentive element when designing a compensation program?  My definition is a reward for performance that goes above and beyond the norm, beyond what is expected.  Thus it shouldn't be a reward for performance that would have occurred as a matter of course.  The intent for offering an incentive is to prompt a change in behavior, to get employees to do something they wouldn't ordinarily have done, and to get them to do it because they have been offered a financial reward.

That should be the plan.

And because these objectives are noteworthy, you would expect that they would differ from year to year as the needs of the organization evolve and adapt to changing business conditions.  This emphasis on annual objectives reinforces the intent that incentives should be designed to reward effort above and beyond those duties listed in the job description.  They should not be repetitive, year upon year.  That's what the job description is for.

Incentive rewards should also not be provided simply because an employee performs their job well.  That particular carrot should be the role of the annual merit increase.  In fact, such an exercise would be considered "double-dipping," paying for the same performance twice.  You should not be using an incentive as an inducement to get employees to perform their expected duties.  Again, that's paying twice to reinforce the same behavior.  It's also using compensation to replace the leader's own responsibility to manage their staff.

Some would consider this using pay as a babysitter.

Is There An Advantage For The Company?

When deciding on whether to add a variable pay opportunity to an existing base salary compensation model, you need to ask yourself, "what will the company receive in return for the increased costs (variable pay) of an incentive program?"  If you are planning to increase your targeted compensation costs by 5% or 10% of the base salaries of an affected group, how will you answer the ROI question?

Caution:  You had better provide a business (financial) rationale, and not subjective phraseology like "survey says" or "everyone else is doing it" or even "it's the right thing to do.'  Management tends to frown on such trivial rationalizations.

It's also worth noting that employees lower in the hierarchy have a greatly reduced line of sight between their actions and business success.  This entails having to create quantifiable objectives for performance (you are quantifying, right?) that should integrate vertically with department, functional and / or organization objectives.  If you don't integrate what you're telling employees to do, you may find yourself paying out incentive rewards when the company as a whole has not been successful.

As a counterargument to the eligibility question I'm often asked about Gainsharing programs.  These initiatives can be a useful method of introducing incentives to select employee groups who have a direct line of sight to potential savings.  They can affect real change.  However, successful plans eventually kill themselves off as viable gains are achieved (low hanging fruit) and payments decrease after the easy pickings are collected.

So, to recap, let's review the business urgency for lowering incentive eligibility to below the management ranks.

  • Is the employee line of sight (performance / business results) direct, or remote?  If remote, what are you paying for?
  • Can you quantify the expected ROI?  The wrong answer here suggests a giveaway.
  • Can you balance the increased compensation costs against hard financial gains for the company?  Are the bean counters nodding their heads?
  • Would the variable pay become strictly an added cost, or would any portion of base salary be at risk?  "No pain, no gain," or "no risk - icing on the cake?"

If you have a reasonable doubt on any of the above points, I suggest you think long and hard before implementing such a program.  It would be very difficult to dig yourself out of that hole.

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.  With over 30 years Rewards experience 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. 

Thanks to Chuck Csizmar / Compensation Café


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