Incentive Management or How to Lose Your Best Employees

Friday, February 10, 2012

Organizations design, build, and maintain incentive plans for a number of reasons; primarily they desire higher employee production. Not just any production will do, it has to be within the constraints of quality, cost, customer expectations, credit worthiness, timeliness, safety, and resource availability. Often the case is that organizations throw money, prizes, gifts, trips, and rewards at a workforce and stand back expecting the orders to come, error rates to fall, collections to increase, and costs to decrease. And when nothing happens, business leaderships are puzzled as to why.

The issue may be due to the way in which an incentive compensation plan was designed and/or administered. It may or may not be obvious that everyone should NOT have the same incentive. Plans have to differentiate between management, administrative, production, maintenance, and sales workforces. In addition, plans must distinguish between individual achievement and effort levels? Yes, Jones bills and collects on accounts payables very effectively, however, after analysis it is determined that he does so on accounts that always pay on time, always pay in full, and are among the organization’s best customers. So why does Jones get a 10% incentive on accounts that require little to no effort, while Smith gets the same 10% incentive for billing and attempting to collect on the worst customers?

While it is clear that not all assignments require the same knowledge, skills, abilities, and experience to complete successfully and should be rewarded differently; so must we make a distinction between employees who are new to their role vs. those who have mastered the job. The incentive structure should not reward the inexperienced worker in the same manner and at the same rate as the veteran. Doing so increases the retention risk of the veteran while building an unreasonable future expectation for the newcomer. It follows that more experienced employees should receive the more difficult assignments, accounts or customers, and thus have the potential to earn higher rewards. That does not mean that a less experienced employee who is a high achiever could not move along the incentive curve at an accelerated pace. An incentive structure should be tuned to the individual’s performance.

Some organizations place caps on incentives; such caps have the potential to have a negative impact on the highest achievers. Provided that increased performance economically benefits the employer, incentive ceilings may be perceived as both unscrupulous and increasing the retention risk of top performers. Focusing on the top achievers, allow organizations to reward performers and build an incentive for others to aspire to the top.

It is relatively a simple task to build an incentive plan. It is a far more difficult process to build an incentive plan which actually delivers the desired outcomes. The process of designing, maintaining, and even adapting a workable incentive plan involves input from all of the stakeholders. Leaving out key players in the targeted workforce, organizational management, legal, finance, HR, payroll, and IT can result in a plan that impracticable, illegal, unsupportable, and fails to deliver the desired economic outcomes.