Tuesday, August 21, 2012

5 Key Principles of Incentive Compensation

Most business owners get incentive compensation wrong.  There are several reasons for that.  The leading cause, I think, is that they pencil-whip it.  They don't really think about changing behavior.   They don't think about how employees might "game" the incentives.  Rather, they pay for virtually accidental outcomes that happen to match their wishes.   

Another approach?  Design the incentives to drive the behaviors you want, based on behaviors the employees can control.  This excellent example came up in a Chief Executive Boards International meeting last week.  It's a classic

A contractor was having a problem with employees not showing up.  If an equipment operator no-showed, 3 other guys were standing around with nothing to do, since the equipment wasn't available.   His solution?   Brilliant.    

He went to all his field crews and said, "Guys, if everyone on the crew shows up every day, on time, for a month, everybody gets a $50 cash bonus."   Simple.  Effective.  Something they can control.  Something they can influence among themselves.    

What happened?  The first month only one crew collected on the bonus.  He handed out the $50 bills, with great fanfare, making sure everyone knew that one crew got the bonus.  What happened next month?   Every crew got the bonus.  They called the guy they were worried about every morning to be sure he showed up.  For almost no money, he solved an endemic problem and attitude that was costing him a lot of money.  That simple solution improved productivity dramatically.   

This is the essence of an effective incentive program.  You want to design around some core principles (SMART):   
  1. Simple -- Easy to understand -- something anybody can grasp.
  2. Measurable -- It's easy to determine whether it's accomplished or not.
  3. Achievable -- It's something that actually can be done -- by ordinary humans.
  4. Relevant -- The incentive causes a behavioral difference in your company that matters.
  5. Time-Based -- A time horizon that people can visualize.  A week.  A month.  A quarter.   Put the carrot close enough so people can see it -- not so far over the horizon they can't see it at all.
Examine your incentive compensation design.   Is it "SMART"?   If you have great incentive compensation strategies that work, click on "Comment" below and share them with others. 

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Terry Weaver

Chief Executive Boards International
Chief Executive Boards International: Freedom for business owners & CEOs -- Less Work, More Money, More Freedom to enjoy it

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