Incentive/bonus plans (also described as "variable pay" plans) are becoming increasingly popular across all industries and all organization sizes. According to a recent national study (WorldatWork's 2005/2006 Salary Budget Survey, www.worldatwork.org) 76% of organizations have one or more variable pay plans in place below the executive level. While I believe that the growing prevalence of variable pay opportunities makes good sense, business-wise, I am also struck by the number of plans that are failing to produce tangible results or benefits.
There is a hesitancy, particularly among business owners, to formalize and document incentive or bonus plans. The preference is to keep them flexible and discretionary, to leave all options open until the last minute (typically year-end), and then grant awards based on the degree of largess and good fortune felt at that particular moment. the upfront commitment that these plans require from business owners, but I have also seen their power to get employees engaged in making a difference. And any risk associated with making this commitment can be significantly mitigated through solid planning and cost modeling. Otherwise, you are left with a plan that is unlikely to result in real changes in performance; "low risk", but also "low reward".
This is fine, commendable even, if all you wish to accomplish is sharing the results of a good year with employees. They generally appreciate the additional money and any willingness to spread the wealth around. But what if you want more? What if you want to:
· Focus employee attention on the key drivers of the company’s success?
· Propel performance improvements?
· Reinforce the outcomes that are critical for growth?
· Assure an adequate “return” on the additional money paid out in bonus awards?
Research tells us – and my experience confirms – that the way to get the most impact from an incentive or bonus plan is to establish a direct causal connection between performance and the reward. In other words, there must be a clear “if this, then that” relationship in place. To the extent that you introduce uncertainty and noise into this relationship, you greatly reduce the impact that the plan will have on performance.
I am a fan of incentive or bonus plans with up-front plan mechanics. This means that the plan is designed with a few key measures tied to pre-defined award amounts for different levels of performance. For example, the plan might state that if the company reaches its goal of $5 million in net income, every eligible employee will be awarded a bonus equal to 5% of their base salary. If well designed and executed, this type of plan should generate the gains required to cover (or justify) the costs of bonus awards, plus some.
I do appreciate
In tomorrow's post, a few tips for increasing your odds of success when you move to a more up-front, structured incentive or bonus plan.
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