Designing employee incentives

Employee incentive programs are a very powerful concept when the employee can understand and see the connection between their performance and their rewards. A great plan will transform the business from an average performer – where people come to work to just do their job and get paid – into one where excellence and outstanding results are the goals and the staff is properly motivated to maintain those goals.

The following are some key fundamentals in any successful incentive plan:

KISS – Keep it simple and special. Good plans are easy to implement and to follow. The employees need to know what they can do to earn an incentive and what exactly that incentive will be. If the plan involves tracking a lot of detailed performance indicators it will waste management’s time and confuse the employees. Look to big picture performance results: Did sales go up or down? Is client retention staying high? Is productivity increasing or decreasing?

Reward Only For Surpassing Business Goals – Incentive plans should kick in only after average performance is exceeded. This means that management needs to have clear goals and expectations. Employees need to have a clear understanding of what is expected average performance and what actions they can take to help the company exceed the basic business goals and thus earn an incentive.

A target goal might be to increase productivity by 10% within the year. The CSRs then need to understand that they will need to handle 10% or more commissions by the end of the year in order to earn an incentive. If the service staff does not increase productivity, then there is no reward.

Reward Great Individual Effort – Catch employees doing something right and make sure everyone in the office sees that management recognizes it. If a CSR did a great job handling a difficult account then shower him or her with immediate praise, recognition and a reward. There does not need to be any analytical performance tracking for this incentive plan. This way the staff will know that management appreciates the extra effort they put in. This is one aspect of the first layer of employees’ incentives.

Encourage Team Results – For service staff and administrative employees there needs to be a fair amount of teamwork in a successful business. In an effective plan, performance results are also tracked and rewarded based on unit or department results. Tracking individual performance can be difficult, so this is a good compromise between rewarding great individual effort (see above) and excellent overall business wide results (such as total growth in sales).

Noticeable Rewards – A good rule of thumb is that the total value for incentive rewards that an employee can earn should be around 8% to 12% of their base compensation. Anything under 8% will not be appreciated. This does not mean that the employee must earn incentives of 8% or more, but that they can earn up to that amount.

Be Creative – Today’s employee looks beyond money for other rewards. They are looking for challenges, recognition and empowerment. Non-cash recognition awards are a very effective way to reinforce the business’s values. They can be a low-cost, high-impact element of the total compensation package. For example, employees who provide outstanding or innovative customer service receive special awards. One way is for employees to be nominated by customers, insurance company employees or by their peers as the top performer of the month or quarter.

Management needs to think about the types of awards that make sense for employees. Here are some examples:

– Provide a day off with pay
– Provide tickets to sports, music or cultural events
– Take out an advertisement in the local newspaper thanking your employees for their contributions
– Provide a donation in an employee’s name to the charity of his or her choice
– Pay for tutoring for the winner’s child
– Have the winner’s car detailed during work
– Pay for the employee’s house to be cleaned
– Pay for an evening out for the winner and their spouse – dinner and babysitting
– Pay for a “pampering day” especially for the ladies such as a day in the spa with massages, pedicure, manicure, etc.
– Allow top performers to have flextime for their work schedule, such as four ten-hour days. Perhaps they can work out of their home once a week.

Long Term Incentives – A good plan will allow employees to earn incentives monthly or quarterly. A great plan will add in a long-term reward system as the third layer of incentives. Think of long-term incentives as golden handcuffs. If an employee builds up a nice little war chest, he or she will think twice before leaving the firm for a small salary bump if they have to forfeit their long-term incentive compensation.

Probably the easiest plan would be to create a deferred compensation plan based on profit sharing. Make sure it is a non-qualified plan to keep it simple. Each year the employee will earn a certain amount of compensation based on business profitability. This can be set-aside in a separate account for tracking purposes. The payment for this long-term incentive compensation is deferred until a few years down the road or the retirement of the employee.

A more exotic approach is the use of phantom stock and stock appreciation rights, which create a reward based on company stock value. Again, the employee cannot access this deferred compensation for several years or until retirement. In some cases it might make sense to actually provide great long-term and key employees with actual stock equity in the firm.

Keep in mind that human nature is such that the long-term rewards are often forgotten or discounted by employees, unless regular reminders are presented to them. Also, this type of approach usually does not directly link individual effort to rewards, but for the purpose of golden handcuffs, that is usually okay.

A Final Thought
A good principle to follow is that if you want outstanding results, you need to be prepared to pay outstanding rewards. Implementation of a creative employee incentive plan will motivate employees to improve not only their own performance but the performance of the firm as well.

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