Staff incentives - don't let bonuses be bad for your business!
There are a number of reasons why you may want to pay incentives to your teams – you may want to grow sales, take on extra people to help and pay incentives to ensure results; or you may want to reward the entire team for collectively achieving revenue targets or other strategic goals. But generally it’s to incentivise staff to achieve targets - financial or otherwise.
There are all sorts of incentives offered by employers to motivate teams. I’ve heard of them ranging from providing beer - for male truck loaders in their 20s - to reduce the number of errors made and therefore costs, to weekends away, and sophisticated employee share and options schemes linked to long term growth of organisations.
Incentive plans can play a big part in attracting, motivating and retaining key staff but should primarily be designed to focus on sustained improvement or gains for your business.
Whatever it is, the right incentives – creative as they may be - can have a surprisingly positive effect both financially and for creating a positive team culture. Talking about the incentive plans and understanding personal triggers shows respect, which is far preferable to imposed goals and incentives which can be perceived as bullying.
Often of course it’s just the gesture of recognition, showing that hard work is appreciated that makes the biggest difference.
But when considering what incentives you can provide I think the key is to keep it simple. Simple for employees to understand, not only look at financial indicators but other measures such as quality, safety, customer retention etc., and simple to monitor so that you don’t need to develop sophisticated spreadsheets to extract data from systems where the records aren’t generally kept.
Incentive plans can be difficult to design, and potentially more costly than intended if you don’t plan the ‘what ifs’ – sales may be good but salespeople may not necessarily deserve to earn more than what’s left for shareholders and owners!
You can make them incredibly complicated with ‘kickers’, ‘overachievement accelerators’, ‘satisfaction scores’ and the like but generally if kept simple, transparent and linked to achievable goals, they can be very successful in helping your business achieve long term sustainable growth.
I’ve witnessed some common incentive plans which are not necessarily ideal are:
Basing incentives on revenues – it might sound easy to pay a top notch sales person 10% of revenue, but what impact does this have on your bottom line? And if you work on net profits, whose idea of net profit is it? Make sure you define the net profits for clarity, and include a baseline, ie what is normal sales, and only reward for exceptional results above this
Basing incentives on the wrong measures – commonly used measures are EBIT, or EBITDA but these measures ignore the cost of capital. Capital required to operate the business can be borrowed from banks or owners, or put in by investors. Under some schemes, such as paying suppliers early to keep them happy, capital has no cost so using capital wastefully is not surprising.
Basing a bonus on actuals against budget – these schemes pay the bonus once the budget has been hit, but this method can amongst other things, encourage the sales team to minimise the sales budgets and maximise sales, and other behaviours including time wasting, and hoarding of information all of which can earn them higher incentives than they truly deserve.
Dividing a sum with managers to share - sounds simple but there are a couple of reasons why this approach is problematic.
These discretionary bonuses discourage open discussions about personal performance
Rivalry occurs because people talk leaving them wondering why someone got paid more than they did, so the amounts no longer matter. You end up paying a bonus which upsets and annoys and makes them more susceptible to leaving
Since there is no guarantee of getting the bonus no matter how good the results are that they achieve, the value is discounted by employees - unless they are good at creating the impression of good work
An employee on a discretionary bonus might spend more time in the office ensuring the boss knows what a good job he is doing, whereas a flat 10% commission will encourage getting out of the office and making another sale. Consequently the discretionary bonus can be damaging to the performance of the company
Payments in full in one year – It seems to make sense to tie bonus payments to annual performance but one year is too short to get any real sense in the strength of the 12 month result. 3 or more years perspective is more realistic to judge how sustainable and how repeatable the result was. Bonuses paid out on the results of one year, generally in hindsight tend to have been overpaid.
Having no bonus opportunity generally leads to higher levels of fixed pay eg. An offer from a competitor of $120,000 salary with a potential bonus of $40,000 may need to be $150,000 salary with no bonus opportunity, to be more attractive.
Be careful to consider if the bonus amount is inclusive of super or not, as more often than not incentives will be considered as ordinary time earnings and you could end up paying more than what you expected.
I’ve seen incentives work well because targets were achievable with the cooperation and application of all parties, and it also had spin offs in reducing sick leave as the group because the team was at a disadvantage.
Getting it right is a great and powerful tool if you want to get key staff to think and act like owners, without actually selling them a part of the business, but getting it wrong can be costly in so many ways.