Effective incentive plans can be implemented "with a lot of forethought, good planning, and proper design," Paul R. Dorf explained to us in a recent BLR webinar. "You can put a new plan in, but it has to be communicated and you have to provide the follow-up and monitoring to make sure it is not being abused and it’s not being gamed, and that it really is benefitting not only the employee but it’s also benefitting the company. There has to be a win-win situation through any incentive plan."
Bearing all of this in mind, you can see how incentive plans can be confusing for employers. Dorf lent his expertise and was on hand to answer questions from webinar participants. Here’s a recap of the question and answer session:
Q. Do you think that bonus plans for a group – such as directors – that use solely EBITDA when calculating the bonus (and not individual performance) are a good idea?
A. That is an organizational incentive plan. With EBITDA as the financial measurement of the bottom line of the company, everybody needs to understand what that means and how it is attained. This situation does lend itself to a formula, which would allow you to create an incentive plan readily. One of the issues with this approach, however, is that it relies on a single measurement (assuming there are no other pieces of the incentive plan); single measurements can be manipulated to a great degree, so having more than one is better.
Q. If you create an incentive plan based on a skill, what would be the best way to figure out the amount of the incentive?
A. If we’re looking at a skill-based program, those lend themselves well to individual incentive plans (as opposed to group or organization-wide plans). One of the traps to avoid is to continue paying an employee for obtaining a skill when that skill is not in use for the benefit of the company. For example, if you pay a premium for an employee getting a specific certification or skill, but they only sporadically need to use it, then you would be better off paying them the premium specifically when they’re performing the skill-based work, rather than simply because they have achieved the qualification.
Q. If your incentive plan is based on acquiring the certification, how do you create the amount?
A. If the certification is a requirement to do the job, often the market will put a value on it – such as the value of having a degree. In the absence of that, then we must make an assessment within the organization to see how much that skill will help the company. We should avoid artificial inflation of pay for skills that do not impact the company.
Q. How do you create an incentive for a production worker when the job is not based on per-piece production?
A. In those situations it might be best to assess the lowest denominator that benefits the company. For example, you could assess the costs of the organization such as inventory loss, waste, etc., and determine a way to incentivize employees to reduce costs (thus increasing profits). Then those savings could be shared with employees.
Q. How do you ensure you don’t dis-incentivize employees from reporting safety issues when implementing a safety incentive?
A. This is a very good point because there have been some OSHA issues in companies that participate in plans that knowingly violate OSHA rules when it comes to accident reporting. Firstly, you should ensure that the incentive plan is controlled and kept separate from other incentives. For example, it might be best to do this incentive plan as a group plan that rewards safety and keep it separate from individual incentives. Additionally, there has to be training of everyone – supervisors, managers, employees – to make sure they are not sweeping anything under the table or hiding things.
To learn more about the various types of incentive plans and help determine which may be best for your organization, see our related article.
For more information on effective creation and implementation of incentive plans, order the webinar recording of "Incentive-Based Comp: How to Design and Install a Plan that Drives Peak Performance." To register for a future webinar, visit http://catalog.blr.com/audio.
Paul R. Dorf is the Managing Director of Compensation Resources, Inc. (CRI) . He is responsible for directing consulting services in all areas of executive compensation, short and long-term incentives, sales compensation, performance management programs, and salary administration programs.