Create a Successful Incentive Program

Paying for Performance – how to structure a process that engages your team, motivates people to do the right activities and delivers to your goals and profit

If you ever wanted to create an incentive program to reward your employees who help the business or if you have tired of incentive programs that don’t work as planned (paying for the wrong activities or for activities that did not impact your objectives), this article will give you a process to create incentives intimately tied to employee engagement and business results.

Disengaged employees won’t deliver the productivity to achieve the incentives, let alone impact the business results. What’s the point in structuring the incentives if you have no one who is motivated or engaged to work toward them?  

If you want specifics on productivity –

“Watson Wyatt’s 2008/2009 WorkUSA Report, Driving Business Results Through Continuous Engagement, released Feb. 10, 2009, reports that highly-engaged employees are twice as likely as their less-engaged peers to be top performers.

……when employees are highly engaged, their companies enjoy 26 percent higher employee productivity, have lower turnover risk and are more likely to attract top talent. The companies of highly-engaged employees earned 13 percent greater total returns to shareholders over the past five years.

Such workers miss 20 percent fewer days of work, and three-quarters of them exceeded or far exceeded expectations in their most recent performance review.

Additionally, highly-engaged workers tend to be more supportive of organizational change initiatives and resilient in the face of change.” ¹

You may already know who your motivated, engaged employees are.   So then you need to determine what they value. What would motivate them to achieve the results you are seeking? You also need to look at your remaining employees who appear disengaged, unmotivated. Should you have conversations with them to find out why they are disengaged?

How to start:

1 – What do engaged employees value? How does this fit with creating a “pay for performance” or incentive plan?

In a recent survey by SHRM – Society for Human Resource Management – in 2009², the top five very important aspects of job satisfaction according to employees in small organizations (less than 99 employees) are:

1. Compensation/Pay
2. Job Security
3. Management recognition of employee job performance
4. Opportunities to use skills/abilities and the work itself
5. Feeling safe in the work environment

The top 4 factors are intertwined.   An employee’s job security can be increased when they work to increase business results in alignment with business goals.   The employer helps employees see the business vision and goals. Employees become engaged when they understand how their skills, abilities and work impact the business vision and goals. Employers and management can continue the engagement of employees by giving feedback and development opportunities.   Successful attainment of business goals should be reflected in the various components of compensation and/or rewards.

Identify the top performers – the already engaged employees. In tough economic times, many consultants and employers feel they should not reward all employees equally. Not everyone’s performance warrants a reward/incentive or even a base pay increase. But the employer’s responsibility does not end there.

When you are rewarding employees for their positive, impactful results, make sure the employee is engaged and clear about the business direction, how they can contribute and how they can be rewarded. Get their feedback — do they value these rewards or what else would be valuable?

When the employee is not rewarded, make sure you as the employer and management explain to an employee how they can learn and change their outlook and behavior to share in performance rewards. At this time, some disengaged employees may decide to leave your company if their philosophies and values don’t match yours.

2 – Let’s talk about Total Rewards instead of Total Compensation

Total Rewards would include:

1. Total Compensation (as listed below)
2. Benefits (health, paid time off, retirement)
   1. Employees may prefer benefits as rewards instead of cash pay increases or incentives. If employees feel that increasing benefits such as time-off or vacation is more valuable – take a look to see if changing your time-off policies are possible.
3. Personal Growth (training, career development, performance management) ³
   1. Tuition reimbursement, attending seminars and conferences, courses for personal and professional development – employees may say they need these items to advance their contributions, performance and careers.

Total Compensation would include:

1. Base Pay, Merit Pay (Base pay increases based on employee performance),
2. Incentives (Cash bonuses based on employee performance),
3. Promotions (Base pay increases based on potential to perform new job)
4. Pay Increases (Base pay increases based on cost of living factors and/or length of service)
   

Are your employees engaged?

3 – Why do some “Pay for Performance “ plans or Incentives fail?

Past experiences and studies have shown that plans fail for some or all of the following reasons:

1. Not sharing or helping employee understand the business goals that an employee will be assigned or will be measured against.
   • Employees don’t understand how their actions fit within the processes and systems to achieve the results that are rewarded.
2. Not accounting for unintended results. Incentives could focus the employee on certain job duties and neglect others. Incentives could produce more than the intended results.
3. Not having the training to effectively achieve the goals for the incentives.
4. Not having a motivated, engaged employee that works to achieve the goals for the incentives.
5. A Profit Sharing plan that has no profit. The company does not have the profit even though the employees work to impact the business results.
6. Missing the appraisal system – no measurements (defined and written); no progress meetings; not feedback to congratulate progress and to help get “back on track”
   • The incentive plan is seen as more subjective than objective. No one really knows where they are in relation to achieving the incentive.

Incentive programs – whether short or long term, one-time occurrence or multi-year should involve these core components and process to create.

The shorter duration or one-time occurrence program would involve a shorter process and less steps or components in creating the program.

• S – Specific to duties, actions and intended results
• M – Measurable to provide fairness and clarity to objective and subjective criteria
• A – Achievable for employees – so that employees feel that they can achieve even more next time
• R – Results oriented
• T – Tracking the results
• E – Employee Involvement and Acceptance
• R – Reward for the Future as well as Present

S – Specific to duties, actions and intended results

1. Start by looking at End – What Results Does the Business Want? This can involve Business Plans for Present, Future and looking at the Past
2. Is this program rewarding short or long term results or combination?
3. Link the results to the company vision and culture
4. How does our culture and vision clarify and support the results we want?
5. What departments or employees need to be involved in generating these results?
6. Tie the Desired Results to a FEW behaviors employees have to demonstrate effectively and productively
7. Tie the Behaviors to the Duties

Here is an example:

Financial planning firm wants to change client service model to achieve the following over the next 2 years and for the future:

Client Feedback and discussions determined that a range of consulting services can be offered with specific enhancements to the present client service model.   These enhancements are certain follow-up guidelines and deadlines and certain initiatives in ensuring very timely account set-up and transfers/exchanges/rollovers from other institutions.

• What are the consulting services – fees, expenses, timelines?
• Do the consulting services fit the vision and culture of the firm? If not — who and what needs to be changed?   Example – do employees feel that we could be charging more for services we already provide at low or no cost? Do employees understand why we should be charging more?
• Who will be involved in initiating these changes?
• We plan to reward the people involved —– what are some of the essential behaviors that may be affected? What actions do we need to see and reward? Are they specific to the person’s current job duties?
  • As an example – Will some employees have to manage and drive the process where before they may waited for direction?
  • Will employees need to outline the details and assure that timelines deliver meeting preparation and follow-up as expected and ahead of schedule?

M – Measurable to provide fairness and clarity to objective and subjective criteria

1. What activities and behaviors need to be measured?
2. How does one measure a behavior?

In our example:

What are the business’ expectations for:

• Deadlines for completing the work – the various parts of the client service model?
• How much time it will take to do the work – for team members (including the employer) to complete the work under their control and part of their job duties?
• How do we measure someone’s enthusiasm and time management skills? So that we are prepared in advance and that we find and correct errors before clients do?

A – Achievable for employees – so that employees feel that they can achieve even more next time

1. Are the actions, behaviors and results achievable? We should not reward extra for what team members are already fairly compensated on.       If the compensation is not fair, that is another issue.
2. The incentive program should motivate an employee to learn and do more in an effective and efficient manner.
3. If an employee does not accomplish all of the incentive or is not rewarded for all of the incentive, there should be a process to evaluate and show the employee how to accomplish more the next time.

R – Results oriented

We need to tie the actions and behaviors to the results we want to see.

In our example:

Review the duties and standards with the employee.

Show her/him how their actions and behavior should be geared to creating systems to prepare for client service meetings and handle the work after the meetings.

Ask the employees to show how our expectations can be accomplished.

Ask the employees to summarize the process. Make sure that employees understand how their actions and behaviors affect the deadlines for client meeting preparation and follow-up and how that affects our business revenues and expenses. How accomplishing the incentives impact our revenues and expenses.

T – Tracking the results

How and who will track the measurements and results? For actions it is easier to quantify – for behaviors, it may be more challenging.

In our example:

Client Service Meeting preparation has all the components prepared and done the week before.   There is a meeting, communication or physical delivery of the expected items. If there are exceptions, that is clarified in the incentive program as to what they are and how to address in order to continue to be on track to achieving the incentive.

Behaviors can drive the results. Part of a regular briefing can cover what is happening to the process and people involved.

E – Employee Involvement and Acceptance

1. Anyone offered an incentive needs to be involved (in varying degrees and amounts of decision-making) and to accept the incentive program.
2. This does not mean that employer or the employee control the program entirely.   Generally, the employer provides the goals and the results desired and the program rewards, but the employee generally gives input on what activities and behaviors are their responsibilities and what rewards might be more special to them.
3. Involvement means giving feedback in a consistent and motivating manner.   The employer needs to acknowledge the work employees do, show them how they can do better and why and show them “how to get back on track”.
   1. Waiting until the end of the program to show employees where they are is not effective and demoralizing.
   2. The employer is not the only person responsible for driving the evaluation process. The employees need to understand their responsibilities in this process. Employees should be asking questions, communicating the status of issues and asking for help.

R – Reward for the Future as well as Present

Sometimes in a down economy or for future business changes – you need to reward for actions and behaviors in advance that lay the foundation. This is sometimes challenging for employers who are working with a restrictive budget.

Here are some things to consider:

• This is why you distinguish and reward your top performers in a manner that is equitable and fair. Not equal – but is perceived as fair and justified.       You can’t give automatic increases to compensation all the time.
• Make it part of your culture to distinguish the rewards for top performers BUT also show in your culture how disengaged employees could work to become top performers and what resources are available to them to do this.
• As the business owner(s), sometimes you have to reward your employees before you reward yourself. Especially if you are building a foundation for the future and need certain actions, behaviors and results from employees now – not later.
• In a down economy, even a small reward can be greatly appreciated. Imagine the gratitude of an employee receiving acknowledgement and rewards that they consider valuable when they know business results are down.

Important Items to Consider

Many employers rush to complete these items without going through the process just outlined.   In some cases you can accomplish both at the same time.

How much to reward?

Research and experience suggests that there is a certain amount that catches people’s attention and motivates them. Smaller than that amount and people are not affected or de-motivated.

Someone once called their 2% base salary raise (back in 2005) – “a milk raise” and proceeded to look for work elsewhere.

• This is where conversations with employees on what they value really benefits the employer. You can talk honestly about the current situation and determine what will make an employee feel appreciated.
• You want to make sure that you retain your top talent.
• You also need to look at your budget to see where you can create allowances for incentives. Even non-monetary rewards such as time off, conferences, personal development programs have a cost.
• You have to consider present and future revenues.
  • If the incentive program is rewarding for present or past results, you may need to pay closer attention to this reward versus the expected incremental increase in revenue, gross profit or profit before taxes.
  • If the incentive is rewarding for future results, where building a foundation needs to occur now, then you may need to create the monies to finance the rewards out of your present budget – forsaking other items.

When to reward?

When to reward is balanced on the nature of the program and how the results are measured and tracked.   You should be meeting with the employee to re-emphasize that the incentive program and amount is not guaranteed and financially the employee should not be counting on it as a given. If an employee sounds as if they are expecting it, you need to meet with the employee ASAP to clarify this. If you don’t clarify, you risk losing the employee’ engagement and morale.

• Typically if results are measured in a cumulative fashion – building totals over the year, then you should look to see if these totals can decrease during the year. If results can decrease during the year and you are rewarding for increased totals, then this maybe an incentive awarded annually.
• If results are measured and rewarded on a case by case basis or individual achievements per period, then you could reward as often as the period. Many employers reward quarterly; others tie it to the pay period.

• You should make the employee responsible for tracking as much of their progress and results as possible. Some incentive plans involve information – revenue and expenses – that are not under the control or accessible by an employee.       Before you reward, it should be understood by the employee that as the employer you expect the employee to track and measure results to the extent they have access to the information. Make sure you, as the employer, and your employee agree on who will document, what will be documented and tracked and who will provide the results for evaluation.

What to document?

• You need to document the incentive program and employees should sign off.
• The provisions – including details – should be documented.
• The measurements for progress, evaluation and rewards should be documented.
  • Who is responsible for tracking and reporting the progress.
  • When are rewards granted?
• When is progress evaluated and what should be prepared for these evaluations.
• The results of the evaluation – including what has been achieved, how the amounts were determined and when the reward will be given.

Can there be multiple incentive programs?

Yes – there can and generally are multiple incentive programs.

Typically these programs are:

• Profit Sharing – designed to reward the team as a whole and when company has profits.
• Individual Incentive Programs – where the rewards are earned as a result of the individual’s work and not affected by what others do. An individual may be rewarded when no one else is and also when the business may not have decreased or no profits.   These programs are usually designed to motivate employees, retain your top motivated, engaged employees and/or project-oriented.
• Team or Group Incentives – where the rewards are earned as a result of the group’s or team’s efforts. These programs are usually designed to encourage better team motivation, work or development.   These programs are also used for special team projects.

Sources

1. Rebecca R. Hastings, SPHR; 3/4/2009 “The ‘What’ and ‘Why’ of Employee Engagement”; SHRM website article.
2. Society for Human Resource Management – 2009 Employee Job Satisfaction – Understanding the Factors That Make Work Gratifying
3. Robert Heneman, Ph.D. with assistance from Erin Coyne, “Implementing Total Rewards Strategies”; ©2007 SHRM Foundation.

For more information on incentive (pay for performance) programs and how to use them for impactful, positive results, contact Mary Dunlap CFP®, MBA at Mary Dunlap Consulting. We help financial planning firms attract, develop and retain the best people for their teams.

For more information or specific questions, contact Mary at mary@marydunlapconsulting.com

Mary Dunlap

My team and I are dedicated professionals who through honesty, caring and desire, provide our clients the tools and processes for sensible, appropriate human resource management, for recruiting the right person for the right job, for coaching people to do better and to direct energies for increased business and personal results.