Why incentives do help

incentives
Incentive program text on blackboard, business concept background

The ideal purpose of incentive schemes is to allow staff to share in the success of the business with greater success translating to greater bonus payments. The same should apply with the quest for innovation, perhaps more so than most other business activities, because it is well understood that companies that don’t innovate, don’t survive.

Traditional incentive schemes

Traditionally incentive schemes, usually referred to as bonus schemes fall well short of the mark. These reward people for years of service with perhaps one per cent pay bonus awarded for each year of service. The aim of this is to encourage good people to stay with the business.

There are a number of problems with such schemes that renders them somewhat obsoletes including:

  • It also encourages poor performing staff to stay.
  • It does not reward endeavour, just longevity.
  • It must be paid even in times of bad business outcomes.
  • Staff expect it as a part of their salary and thus is it not treated as a bonus so it does not work to “incentivise”.
  • It can become very costly for the company in the case a staff member that may have accumulated 30 years’ service.

KPI’s based incentives

Incentive schemes are ways to reward people who meet certain agreed KPIs. Such scheme are very common but less than ideal for a number of reasons including:

  • Meaningful KPI’s are hard to set for certain job functions.
  • Clever operators can manipulate KPI outcomes to achieve KPI rewards.
  • They do not align all key positions as one key position may be motivated to achieve a KPI by working to erode another department managers KPI. There are numerous examples where this is done.
  • Such a scheme seldom trickles down to the bottom rung of workers.

Performance against forecast EBIT

This approach seems to be the most equitable and easy to implement method and has been seen to work well in major organizations. With this method every member of the organisation benefits. Indeed, why should just top management and senior staff alone be incentivized? Success in business should be a team effort with team rewards.

With this approach a target EBIT is set for the forthcoming year. Staff do not necessarily need to know the quantum or forecast actual dollar EBIT figure, perhaps instead just a mark on a barometer graph updated monthly to show progress.

If the target EBIT is met then all staff receive a bonus payment related to their seniority or rank in the business.

For example a senior or “C” level executive may receive a 25 per cent salary bonus for meeting EBIT targets, the next level down, perhaps 10 per cent, the next lower level five per cent, down to the bottom level of perhaps three per cent.

In this way, all staff are engaged with the business and are incentivized to work towards ever better EBIT outcomes.

The percentage payments as bonuses can also be linearly linked to the business performance against that target EBIT. For example, if the EBIT actually achieved is double the EBIT target then bonuses are accordingly doubled.

Such a scheme is easy to implement as well as incentivising and rewarding everybody.

Roger La Salle, www.innovationtraining.com.au