Pay it Foward

To get the most out of employees, experts recommend business owners and managers set up incentive programs

Bonuses and incentives are a major component in recruiting and retaining some of the best employees in any industry.

Big corporations have known that for a long time. But some small businesses may find incentive plans and bonus calculations a bit intimidating.

Get rid of that fear, the experts say. Employers need to understand that there is no one uniform plan that fits every industry, company or employee. The plans should be varied, simple and consistent to be effective, according to folks who design them.

The importance of incentives in today's economy is evident in compensation statistics from the last eight years, said Paul Dorf, managing partner for consulting firm Compensation Resources Inc.

According to information gathered by Compensation Resources in 2006, 86 percent of executives reported receiving incentives, compared with 72 percent in 1998; 54 percent of nonexempt employees reported receiving incentives in 2006, compared with 38 percent in 1998; and 48 percent of hourly employees reported receiving incentives in 2006, compared with 29 percent in 1998.

By asking the following questions and adhering to the guidelines listed below, an employer can create an incentive plan that produces results and can make both the employer and the employee happy:

What problem are you trying to solve?

By installing an incentive plan, the employer needs to evaluate what problem has necessitated the plan and what it thinks it can gain from implementing the plan, said Susan Hengel, principal of human resources at Birmingham's Cypress Partners.

"It's easy to throw money at a situation," she said. "But it's hard to change the behavior of management employees. Is this truly a problem that can be solved with incentives?"

Hengel said she advises looking at three things when setting up an incentive plan: What are the employees used to receiving to motivate the greatest behavior? How much does the company have to spend on bonuses and incentives? Does the company understand how to pay incentives to achieve the desired behavior?

The KISS principle: Keep It Simple Stupid.

One of the major things that can kill an incentive plan is complexity, Dorf said. Setting realistic goals and having people understand them is a large part of the plan itself.

Dorf advises that companies have no more than four, but at least three, different incentive plans implemented. With too many, he said, they become meaningless and unimportant.

Also, the system may be easily manipulated, Hengel said. "There are so many calculations that drive bonus plans," she said. "People focus on the calculations and how to manipulate it, and you don't get the behavior you wanted."

Have variety within the plans, she said, or else something given over and over becomes expected and employees may begin to feel entitled.

Remember the acronym.

Dorf uses several acronyms to advise clients on installing incentive plans. One such is F.A.R.M.: focus the employee on what you want; attract the right kind of people; retain those people and motivate.

Another he uses is S.M.A.R.T., which applies to setting the goals for the employees: specific, measurable, attainable, realistic and time-bound.

"Sometimes (goals are) beyond the employees' capabilities," he said, therefore rendering the plan useless, "and that adds to the frustration level."

His last acronym is C.U.P.C.A.K.E., which, he said, should sum up the whole plan: Commitment by top management; uniform applications; potential for improvement; communication; accountability; keep it simple and effective.

Always have a way out.

Both Dorf and Hengel agree that employers should have a way out of the incentive plan, but only when it is not working or creating the desired effect. Many companies, they said, will pull the plan because it is working too well, which can create loss of trust and credibility.

Make sure the plan takes into consideration life and the level of products being sold, Dorf said. While the company can change the plan, it can only change it prospectively, not going backward, because the incentive can't be taken back once it's given.

"Don't change in the middle unless it's clear that it's not working," Hengel said. "You are almost better starting small and letting it grow. Maybe put it in for a quarter and pull it back."

Communicate, communicate, communicate.

While an open-book management policy can be good, Dorf said, employers don't have to share with their employees every detail of their profits and expenses.

However, something as simple as a barometer set up in the middle of the office can inform employees of the company's progress and where they stand within that progress.
 
"You can use that simplistic form of communication, not spreadsheets and data sheets," he said.

"It can say, 'Here is the company's performance. If we hit this level then we get this much increase that can be spread out in bonuses.' It's important to communication. What do we need to do to improve? If the company does well, then so do we."

While it is not required by law to have the plan written, many companies will so that it can be put in an offer letter, still making it clear that the company has a way out, Hengel said.

Keep it close.

Hengel said it also is important to keep the phases of giving a bonus close together - when it is announced, when the employee wins and when the employee receives it, keeping the last two the closest together.

"Connect the reward closer to the behavior to the extent you are able to, or have rewards that increase over time," she said.

"As an employer, I would rather pay for desired performance when it happens, rather than every so often or once a year."