Wednesday, February 17, 2010
As with any form of employee compensation, there must be a business linkage and reason for such forms of remuneration to exist. The basis for incentive and variable compensation comes from their ability to direct an employee’s energy and focus the employee towards a specific goal, i. e., to motivate action.
A general definition of motivation is:
• internal state or condition that activates behavior and gives it direction;
• desire or want that energizes and directs goal-oriented behavior;
• influence of needs and desires on the intensity and direction of behavior,
• the arousal, direction, and persistence of behavior.
Common thinking is that almost any human behavior is capable of being incented or motivated and thus shaped into a desired action. If higher sales are required, fewer product defects needed or increased customer service levels demanded; incentive and variable compensation will focus the employee’s actions towards that goal. Unfortunately, it is not as simple as increasing the commission on new sales, adding a bonus for fewer rejected sub-assemblies or adding a cash incentive for handling more customer calls. To uncover the root cause of poor sales, high defects or lackluster customer service may require significant research. An incorrectly designed incentive, bonus or variable pay plan may lead to undesirable outcomes in another area of the business.
I once worked for a billion dollar bank that provided check and item processing for surrounding community banks. Every day these smaller banks shipped their items to us for processing and clearing. Each item processor was paid a base hourly rate plus a per piece rate for each correctly processed item. Once all items for that day’s work had been processed, the operators could leave for the day. What I saw was that as soon as one operator had completed their own work, they immediately began to help the other processors. Consequently, all operators were able to normally leave work 1-2 hours early every day. No one had ever told them to pitch in and help with each other’s work, but getting to leave 1-2 hours early every day was more important than the 1-2 hours of base pay. Nor did they mine losing the variable compensation from their shared work. The result was that our item-processing center was highly profitable and efficient.
While working for a large mutual health insurance company we began to notice that our sales force cross competed with each other on product lines. Many sales members had long and strong relationships with their clients and we certainly did not want to harm those relationships. Products like PPO’s, POS’s, and HMO’s were still relatively new and unfamiliar to our traditional indemnity sales force. A decision was made to create a consolidated sales force that would market all product lines to all clients. To incent sales members to focus efforts on the newer and more profitable PPO’s, POS’s, and HMO’s products, sales members were paid an incentive to team sale by taking a member from two or more product lines along on each sales call. Sales members who accompanied the lead sales member were paid an incentive to participate in the presentation. This allowed for a smooth transition to a consolidated sales force, cross trained the traditional, PPO’s, POS’s, and HMO’s sales members, and allowed old relationships to be maintained and new relationship to be developed. One unexpected outcome was that an increased number of clients purchased multiple product lines.
At large multi-state health care provider our collections began to fall off after a change in the management team. As we looked for the root cause of this decline, it was discovered that two job classifications were essential to the collection’s process: the biller (data entry) and the collector.(customer/payer calls) The collector position was paid a base rate plus variable pay based on their collections for the past quarter, the biller was paid a base rate only. The decision was made to add an incentive to focus the biller’s attention on getting care information into the system and billed to the proper payer, thus allowing the collector to follow-up on overdue payments. The outcome was those delinquent days declined and collections returned to acceptable levels.
While consulting with a large multi-state educational institution, I learned of an incentive plan that paid classroom instructors to show up on time for each class session. My recommendation to the institution was that showing up for class and on time was a basic function of the role and had to do with manageing performance. Digging deeper, it was discovered that department heads lacked basic skills in setting expectations during the interviewing on boarding processes. The root cause of this performance issue was related to the failure to set expectations, monitor new hire performance, and follow-up with performance coaching. The institution is in the process of eliminating this incentive and measuring the outcomes.
As with any form of employee compensation, there must be a business linkage and reason for such forms of remuneration to exist. The basis for incentive and variable compensation comes from their ability to direct an employee’s energy and focus the employee towards a specific goal, i. e., to motivate action.
A general definition of motivation is:
• internal state or condition that activates behavior and gives it direction;
• desire or want that energizes and directs goal-oriented behavior;
• influence of needs and desires on the intensity and direction of behavior,
• the arousal, direction, and persistence of behavior.
Common thinking is that almost any human behavior is capable of being incented or motivated and thus shaped into a desired action. If higher sales are required, fewer product defects needed or increased customer service levels demanded; incentive and variable compensation will focus the employee’s actions towards that goal. Unfortunately, it is not as simple as increasing the commission on new sales, adding a bonus for fewer rejected sub-assemblies or adding a cash incentive for handling more customer calls. To uncover the root cause of poor sales, high defects or lackluster customer service may require significant research. An incorrectly designed incentive, bonus or variable pay plan may lead to undesirable outcomes in another area of the business.
I once worked for a billion dollar bank that provided check and item processing for surrounding community banks. Every day these smaller banks shipped their items to us for processing and clearing. Each item processor was paid a base hourly rate plus a per piece rate for each correctly processed item. Once all items for that day’s work had been processed, the operators could leave for the day. What I saw was that as soon as one operator had completed their own work, they immediately began to help the other processors. Consequently, all operators were able to normally leave work 1-2 hours early every day. No one had ever told them to pitch in and help with each other’s work, but getting to leave 1-2 hours early every day was more important than the 1-2 hours of base pay. Nor did they mine losing the variable compensation from their shared work. The result was that our item-processing center was highly profitable and efficient.
While working for a large mutual health insurance company we began to notice that our sales force cross competed with each other on product lines. Many sales members had long and strong relationships with their clients and we certainly did not want to harm those relationships. Products like PPO’s, POS’s, and HMO’s were still relatively new and unfamiliar to our traditional indemnity sales force. A decision was made to create a consolidated sales force that would market all product lines to all clients. To incent sales members to focus efforts on the newer and more profitable PPO’s, POS’s, and HMO’s products, sales members were paid an incentive to team sale by taking a member from two or more product lines along on each sales call. Sales members who accompanied the lead sales member were paid an incentive to participate in the presentation. This allowed for a smooth transition to a consolidated sales force, cross trained the traditional, PPO’s, POS’s, and HMO’s sales members, and allowed old relationships to be maintained and new relationship to be developed. One unexpected outcome was that an increased number of clients purchased multiple product lines.
At large multi-state health care provider our collections began to fall off after a change in the management team. As we looked for the root cause of this decline, it was discovered that two job classifications were essential to the collection’s process: the biller (data entry) and the collector.(customer/payer calls) The collector position was paid a base rate plus variable pay based on their collections for the past quarter, the biller was paid a base rate only. The decision was made to add an incentive to focus the biller’s attention on getting care information into the system and billed to the proper payer, thus allowing the collector to follow-up on overdue payments. The outcome was those delinquent days declined and collections returned to acceptable levels.
While consulting with a large multi-state educational institution, I learned of an incentive plan that paid classroom instructors to show up on time for each class session. My recommendation to the institution was that showing up for class and on time was a basic function of the role and had to do with manageing performance. Digging deeper, it was discovered that department heads lacked basic skills in setting expectations during the interviewing on boarding processes. The root cause of this performance issue was related to the failure to set expectations, monitor new hire performance, and follow-up with performance coaching. The institution is in the process of eliminating this incentive and measuring the outcomes.
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