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Do You Have the Right Compensation, Incentive and Bonus Plan or It's All About Me, Me, Me

Mar 19, 2008
Like the rat in the cage we are driven by rewards. It's only human and also perhaps rat nature. Suffice it to say it's nature.

So when compensation, the reward, becomes stagnant so does productivity. If like rats we are paid by the time we spend in the cage, then the expected level of productivity is simple compliance.

By focusing on minimum standards employees tend to get there and stay there; a comfort zone or twilight zone or Bermuda Triangle whatever else it can be called.

That comfort zone is not where you need nor want to be. Did you make a conscious decision to not do what is in the best interests of your company? Why? Don't you ever ask what does your company need? What is the first step?

If you need to make changes, be wary of copying formulas. The best plan is the one that works best for your unique circumstances. Look first to your industry but also take a look outside your industry when looking for the right compensation plan.

The important thing is to first look for the concepts in compensation that drive your company's performance and productivity.

Sometimes combinations of plans work the best. Simpler is better but sometimes by combining two measures, such as productivity and attendance; a compensation plan can be enhanced.

The best approach is to identify which key performance indicators should be the foundations for the compensation plan.

If you are going from a 'time and space' or hourly wage rate to an incentive plan then look for ways to start that change. There may be a great deal of reluctance on the part of your current employees but ask for their opinion. That way, once the plan is implemented there should be no complaints.

Talk about the new plan in your business, group and team meetings. You might start by using small gifts or cash rewards for top performance which helps employees get accustomed to the idea.

The idea is to try to modify your employee's behavior little by little so it's preferable to start small and gradually gain credibility. Actually rats do the same thing.

Use spreadsheets to work out the ranges of possible plans. Be wary of straight commission as it can often create internal friction. Don't forget to look at tying part of your bonus or incentive plan to overall company performance.

Once you have a plan you can test backwards to see how it would work. Depending on your plan, you can do a trial run and see how employees react. Make certain that poor performance is not rewarded.

Establish a minimum performance level and make it the low end of your compensation scale. Make sure your plan is easily track able by both you and your employees.

Under ideal circumstances top performers should get at least two or three times more than minimal performers. Even if you are not able to create such a variation "skew" the better rewards should go toward top performance.

As with all incentives and bonuses it is important that the prize be something the employee considers of significance. Pure praise is fine but a cash reward or dinner for the family makes it tangible and real. To give someone a paltry bonus is the same as saying it does not matter. If it does not matter, why do it?

It is better to have a low base wage/salary with a large incentive component. If the base is too high there is little incentive to perform at higher levels.

Expect minimal employees to whine, complain and quit after the plan is in place. Expect to see more qualified and motivated employees wanting to join your company. Expect your better employees to become more loyal.

A well designed compensation plan can give your company a strong competitive advantage. Too bad your competitors may find it impossible to compete directly with you for the best employees.
About the Author
Jack Deal is the owner of Jack D. Deal Business Consulting, Santa Cruz, CA. Related articles may be found at http://www.jddeal.com/blog/human_resources and http://www.freeandinquiringmind.typepad.com
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