Some good news: During times like these, we have the unique opportunity to really determine - with a huge degree of certainty - the viability and efficacy of our incentive compensation plans.
Bottom-line (no pun intended), if you are seeing poor earnings or results today, but still paying out boatloads of money, then ...
You're doing it wrong!
Not that we cannot ever pay for effort versus results; sometimes we do just that, but at lower levels of the organisation, where "line of sight" to profitability is less than clear.
But folks, if you're paying big (or even "any") bonuses or incentives to managers, leaders or executives, and your company's performance is in the tank - "Stop it!"
First, some definitions. I use specific words in compensation to mean specific things, and the two that are key to this article are Bonus and Incentive.
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Bonus - A Bonus is just that. Something more than expected. Something provided on top of that which I felt deserved or was entitled to. If I buy a single-scoop ice cream cone, and the young lass gives me two scoops, that's a bonus. Not sure what I did to get it, not sure how to get it again, but plenty pleased that I received it now.
Same thing with a Bonus in compensation. Happy to get it, certainly grateful, but no clue exactly why, or what I can do to ensure its payment again next time.
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Incentive - An Incentive, on the other hand, is the payment for an "if-then" statement. If you do this, then I'll pay you that. If you exceed production by 10%, then I'll pay you 5% of your annual salary. I know what I did to get it, and presumably know what to do to get it again.
And Incentives are expected. We had an agreement, and I expect you to honour it with payment.
So, if we want to encourage behaviour with compensation, it's clearly going to be through incentives. But we must use caution; it's easy for the "law of unintended consequences" to creep into incentive efforts. So, what makes an appropriate, effective Incentive Plan?
First, it must reward correctly. In the compensation world, it's not what you want, wish for, hope for, or manage to; it's what you pay for. Many an incentive plan short-circuited when it was discovered it promoted behaviour we did not want, just to get to results we did.
Pay attention there.
Next, it must influence behaviour. By that I mean a couple of things:
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It must be understandable, that is, I must realise what I can do to reach the incentive, and
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It must be sufficient to warrant a behaviour change. Make it chump change if you want, but don't expect your best and brightest to get on board. Realise that, if you get it right, it doesn't really matter anyway, does it?
Finally, it must, must, must be kept simple. Complicated plans create two significant issues:
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They become too onerous for people to comprehend. No understanding, no change in behaviour.
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Employees believe that complicated plans are simply corporate subterfuge. And I agree. Plans do not need to be tomes like War and Peace. A page or two tops is all they should take. More than that, and you are clearly talking about why we won't pay the incentive, instead of why we will.
Incentives can work. They can provide the behaviour changes you need in your employees today to drive results in the face of almost any economic conditions.
Done well, and you're paying incentives from a bucket of money that you wouldn't have had anyway, so it's great! Done poorly, and you're paying out money after losing money.
Let's avoid that last one, shall we?