Things to look for if you are going to use incentives

"Motivation is the art of getting people to do what you want them to do because they want to do it. "

     Dwight D. Eisenhower

Germane to President Eisenhower's thoughts, motivating or incenting people to perform a certain way is about setting the stage for the individuals to actually want to perform this certain way. This is the first rule to designing an incentive program that will engage the associates. From the outset, it needs to be clear that this is the first part of the design. The program must also be beneficial to the company by addressing its needs and by avoiding incenting undesirable behavior from associates.

Incentive compensation programs should never be implemented prior to a serious process improvement initiative and the implementation of engineered labor standards. Not respecting this order likely guarantees you will face serious issues.

What are we trying to achieve?

The main reasons that we are considering implementing incentive based compensation should be at the forefront of our design process. There has to be an overwhelming reason that we want to go in this direction rather than the more traditional hourly remuneration. We can typically group these objectives into three main categories:

1. Increasing profitability and customer satisfaction
2. Improving associate retention
3. Minimizing the impact of fixed costs

These categories are certainly not mutually exclusive, but usually there is one that initiated the process of designing an incentive based remuneration strategy. Company goals should be clear from the start as these will dictate many decisions regarding the criteria to consider in the incentive calculation.

Creating a Win-Win situation

"The task before us, then, narrowed itself down to getting Schmidt to handle 47 tons of pig iron per day and making him glad to do it. "

     Frederick W. Taylor

As previously mentioned an incentive program will only work if the associates recognize the inherent benefits of the program and actually work towards reaping the benefits. To make this initiative a Win-Win, the company needs to also meet its goal(s) based on what they are trying to achieve through the incentive program. The company needs to create a balance between the incentive payment and the savings derived from those payments. Some of those savings (e.g. improved associate retention, reduced medical insurance, higher utilization of equipment) can certainly be quantifiable; on the other hand savings such as improved customer satisfaction and increased service levels may not be as easily quantifiable. The consequences due to a failure to create a Win-Win situation will be explored later in this post.

Different forms of incentives

Originally, incentives were purely based on monetary compensation. Programs were designed to link associate compensation to the amount of work that was accomplished. Companies were focusing on achieving a higher throughput with its existing workforce and were willing to compensate those that helped reach this goal. The targeted work involved mainly manual work performed on an individual basis. For example, early incentives set by Taylor touched tasks such as shoveling or carrying pieces. Within this strategy, different variations of this form of incentives existed:

• Piece rate
• One for One
• Measured Day Work

Even though many companies today still use plans that strictly focus on productivity, it is advisable to consider multi-criteria plans that will incent more than just an increase in productivity. Multi-criteria plans will consider various factors (e.g. productivity, assiduity, quality, damages, accident rates) in order to minimize the negative issues often associated with plans that only focus on productivity. It is the only way to minimize behaviors that increase productivity at the expense of other important components. For example, an associate that may ignore basic health and safety procedures in order to be able to increase his or her productivity.

Traditional plans always involved a monetary incentive as the form of compensation. Today we are seeing other means of compensation being sought by associates, such as:

• Additional paid time off / vacation
• Leave early when you are done with your day's work
• Rewards

Notwithstanding these new forms of compensation, monetary compensation still remains the most powerful incentive when it comes to incentive compensation plans.

There are no secret recipes

The key to building a successful plan is two fold: understand what the company wants to achieve and understand what will motivate associates. Once you have figured this out, you can design the plan, run various scenarios on potential payouts, and also evaluate what type of negative impact could result from your plan. The following steps can be used as a guideline:

1. Understand the company's goals
2. Understand the predominant motivational factors for the associates
3. Make sure you have done all the prerequisites (i.e. process improvement and engineered labor standards)
4. Build a multi-criteria plan
5. Simulate the associate's earnings versus the associated costs
6. Sell the program to the associates
7. Implement, audit, and monitor the plans earnings and costs

Doing your homework will minimize the risks of failure.

How can it go wrong?

Like many other things in life, once companies learn about the benefits of incentive compensation, they want it now! However, prematurely implementing an incentive compensation program before doing the necessary homework will get you in trouble. You are much better to spend time understanding the basics that were explained earlier in this post than to dive in the deep part of the pool and drown.

The three main failures associated to incentive programs are:

1. No associate buy-in
2. Out of control payouts
3. Incentivizing bad behaviors

The first case may be the least damaging to an organization; it simply results in a program where associates don't truly participate. Typically, associates will initially try to earn incentive and will stop doing so if they believe the extra compensation is just not worth the effort. As a result, the company doesn't get any of the anticipated benefits from the incentive program, but at the same time they limit their losses in investment in designing and implementing the program.

An incentive program that creates an "out of control" situation -- meaning that the incentive payments far outpace the savings -- creates negative impacts on the company. The question becomes: how do we get out of this situation? The answer to this question is complex as it depends on many factors: Was the program part of the collective bargaining agreement ("CBA")? How will the associates react if you cancel the incentive program? Can you easily get out of this program? Very often companies get into this situation due to underestimating the levels of productivity that associates can achieve. Typically this situation occurs when the process isn't optimized, but more importantly when the ELS are inaccurate.

Incentivizing bad behaviors is a consequence of oversimplifying an incentive program and not using multi-criteria calculation of incentive payouts. Without checks and balances it is quite possible that associates will find ways to "cheat" and earn high incentives at the expense of other important factors such as quality and health and safety.

If you are thinking about incentives, take a step back: make sure that you have all the prerequisites in place and start understanding what will motivate your associates.