Consulting Services | Employee Incentive Program
Design & Implementation
Employee Incentive Programs
WHY EMPLOYEE INCENTIVE PLANS WORK
The main reason
I find companies don?t have
is not that they won?t be helpful or that the
owner is averse to paying out incentive. It?s usually
that owners see
Incentive Plans as being complicated and potentially
more harmful than good because it may cause employee
dissension (Why did he get more than me?)
I stress keeping the plans as simple and as transparent
as possible and teach that it?s a ?work in process? with
minor (or major) adjustments over time. I work hard to
build in the fairness up front but I also listen to the
employee feedback from the first few payouts and adjust
the rules to be fair.
In my experience, the payoff has always been
huge, contrary to some Harvard Business Review that says
Just ask some of my clients.
Owners of companies generally feel that they
about the company than their employees because the owner
has a greater stake in the company?s success. If this is
true, then the answer to getting employees to give more
effort to bring in profits is to give them an
ownership stake in the company. But it may not be an
option or a desire of the owner to give away ownership
or stock in the company.
But there is another way to give employees an ownership
stake. The idea is to give employees an opportunity to
share in the profits of the company.
That doesn?t mean they share in all the profits.
They share in the profits
that come in
above a set level; the level that separates a good
company from a great company. By sharing in the
rewards of a successful company, employees tend to care
about how profitable the company is. For years, the most
companies have used this technique to increase
morale as well as drive up their profit levels.
SETTING A BASELINE
There must be a benchmark to start, for example 30% of
gross profit or 10% net profit. Up to 30% gross profit
or 10% net profit, no incentive will be shared with
employees. This is because that level of profit
represents an average return, an average company, a
grade of ?C?, meaning the company operated at only an
acceptable level, not an outstanding level. That money
is needed just to sustain the company.
we must ask the people to be
Show them the rewards for earning returns above the 30%
or 10% mark. Show them that they can make $500, $700,
$1,000, $10,000 or more in incentive pay each year for
driving the company?s profits to beyond normal
Now they have an ownership stake. Now they have a reason
to be more productive, to make sure quality meets the
highest standard and that the customer is satisfied
enough to return. This is known as an
and it is what I?m proposing here. Below are some basic
steps of a plan and the details of an actual plan that
worked for one of my clients:
Set a baseline profit level (Remember goals must be achievable)
Decide on payout periods, methods and dates (Monthly, quarterly,
Decide on anticipated payout amounts based on an employee?s
value (See the chart below)
Decide on an evaluation method for each employee type
(performance evaluations are a must)
Communicate it with employees
(The more transparent the plan, the fewer complaints)
Measure, Payout and Follow-up
Below is an actual
Incentive Plan set up for a company I consulted at.
The end results (along with some other improvements in
estimating and productivity) brought an additional
$400,000 in annual profits for the $7 million dollar a
year construction company. The owner shared over
$110,000 with his non-management employees that first
year. Every Incentive Plan should be set up
differently and geared toward the company?s particular
(While I highly recommend basing
non-management employee payouts on Gross Profit, this
contractor was adamant that all his employees, mainly
job superintendents, contributed to his operating
expenses and he insisted on payouts based on net
Based on our discussions and how the company performed
in the recent past, (2% net profit last year) we set 6%
net profit level as a baseline or benchmark of
could do this because we also had made several recent
improvements in estimating methodologies). The 6% of
sales net profit level represented an expected level of
profit for the company in this years? business plan.
The majority of this 6% would be money for
management bonus or funds put back into the company for
equipment and growth. We decided that at least 90% all
profit above the 6% would be distributed to
(The baseline profit level
should be evaluated each year and can be lowered or
raised by the owners at any given time based on market
conditions or recent profit levels.
Again I remind you that
goals must be achievable or you ruin the whole concept)
decided the payout in 2006 would be made once a year.
(While I recommend
payouts at least quarterly or semi-annually, this
particular contractor felt he needed a full year to
evaluate performance and profits so we agreed to one
The single payout was planned for December to coincide
with a generally slow season and the holidays.
Payout would be a projection of final sales and costs at
the end of December. 10% was held back in case profits
came in lower by the end of the year.
An adjustment payment would be paid out in
January. (This has worked well, providing a nice little secondary check for
everyone in January)
Individual payouts are based on the value that a person
brings to the company.
Typically value is decided by 4 things:
Position title, impact on profit and authority
(translated to a
Full-time / Part-time status
formula was devised based on the first three categories
above. A dollar amount is achieved for each employee
using these factors distributing all the money set aside
for incentive pay that period.
That amount is then multiplied by the performance
review (set in percent) to dictate the final payout.
instance if the first amount is $1,000 and the employee
received a 95% rating, they are paid $950)
Money not paid because of reviews less than 100% can
either be simply redistributed back to the gross amount,
or set aside to be included in a future payout.
This ?set aside? is one of many ways the company
can protect itself in case there is a downturn and
profits in future quarters drop drastically due to
performance or economic reasons.
here that rules of the payout should be put in writing
and a signature denoting that they received a copy of
the rules should be kept in each employee file)
Evaluations are based on an individual?s
performance during the current cycle. The evaluation of
performance for each person within the group is designed
to give a top rating based on 100%. A 100% score means
an employee gets 100% of the set aside amount. Each
score below 100% gets that designated percentage of the
amount derived from the formula.
plan should be communicated to all employees as soon as
it is finalized so as to have maximum impact. Progress
reports on how the company is doing against the plan
helps keep interest keen and employees attentive to
quality and productivity which are always profit
results of a designated period
quarterly) should also be communicated in monthly
meetings or handouts.
(This is a great
idea even without an
Study after study shows that employees are always
curious how the company is doing yet we are continually
negligent to tell them unless it is bad). This will
keep interest in the program and will ensure a feeling
of ownership throughout the year among the
time, baseline profit margins may be adjusted up or
down. In better market conditions, when profits should
be up, we should avoid raising the benchmark level too
much. The more reward your people see, the better
overall they will continue to perform. The impact this
can have on good people is hard to measure but easy to
Your best people expect and deserve to be well-rewarded
for their work.
They?re the ones really driving the profit
should also refrain from lowering the mark too much in
tough market conditions. We should instead ask our
employee again to be excellent. We should ask them to
rise to the occasion and find ways to overcome hardships
and make profit in tougher conditions, to adapt to the
market we work in.
And always remember it?s a work in process.
There will always be a little discontent among
certain employees. But then again those employees are
probably the same complainers now that you don?t have a
complain, regardless of what you do. If
your plan is fair for the strong majority, then simply
offer the employees complaining to quit cutting them an
This usually quiets the whiners.