Making incentives worth striving for

By Harry S. Dennis III, for SBT
Once upon a time, Jack went up the beanstalk. Insiders tell me he really did expect to win a prize at the other end. What kind of prize? A surprise — something unexpected but worth climbing for.
And so it is in business. We all climb stalks, and we want to fervently believe they are worth climbing. In TEC, we use a simple qualified profit-sharing plan to encourage employees to help us reach our annual objectives. If we reach them, we go the max in terms of company contributions on behalf of our employees. (For years we have contributed 15% of our qualifying employees’ annual wages.)
So how do incentives work? There are really only two different approaches when you cut through the fine print. First, there is the most traditional one called the “nondiscretionary” incentive. Second, there is the “discretionary” incentive. The latter is the most difficult of the two.
I’m excluding any talk or reference to public company incentives, such as stock options, SARS, or private company special “phantom stock” or “performance share” plans. Those are all very legitimate incentive performance options, but beyond the scope of this column.
Nondiscriminatory incentives
The basic concept here is to establish performance targets. The most typical ones are:
a) operating profits as a percent of sales
b) return on assets
c) return on investment
d) return on capital
e) value added as a percentage of revenue
You set a base level of profits or return that you need, and the performance targets kick in above that. They graduate upwards, i.e., the greater the results, the more the incentive kicks in.
You have to set your incentive pool, meaning, who’s in it? Then you rank their base compensation from top to bottom. Assuming the incentive is met, everyone is paid out proportional to their participation in the pool. For example, if Mary’s salary is $100, John’s is $75, and Bill’s is $50 (and these are the only three people making up the pool), and the pool is $1,000, then we do the following:
Total payroll in this case is $225. Mary’s share is 44%; John’s is 33%; Bill’s is 23%. Final results: Mary receives $440; John receives $330; and Bill receives $230.
That’s the concept. The big issue: Who do you put in the pool? Always a difficult decision. But if you are the CEO, keep yourself out of it. Out of the nondiscretionary pool that it is. Very politically smart and business correct.
Discretionary incentives
The basic concept here is to reward exemplary individual performance based upon a “set aside” of funds for this purpose. It allows an incentive giver to take a high performer the extra mile. Goals can be set for discretionary incentives, but they should always be individually targeted. Goal-line oriented. Field goals don’t count, so to speak. It’s a quiet way of saying that “You really count here.”
Let’s conclude with some basic stuff on incentives. First, strategically, incentives beyond the call of duty are a very good idea. Second, incentives as an afterthought, well, they just stink. Third, incentives really are good, if you make them right for your people. Have solid structure and definition. In TEC, we have seen that the best incentive programs lay out the incentive objectives in advance, monitor them at least quarterly, and then celebrate!
If we know in advance what our goals and objectives are, if they are measurable, then incentives can work. If we don’t, then it just becomes another superfluous scam on our intelligence. Until next month, good incentivizing!
Harry S. Dennis III is the president of TEC (The Executive Committee) in Wisconsin and Michigan. TEC is a professional development group for CEOs, presidents and business owners. He can be reached at 262-821-3340 or at hiduke@aol.com.
Nov. 23, 2001 Small Business Times, Milwaukee