Foundations For an Effective Employee Incentive Plan

by Michelle Bomberger | April 23, 2019

Over the past few years, the emphasis on employee engagement and happiness has been forefront in the business news and best practices. And though more companies are realizing Ping-Pong tables aren’t essential for workplace happiness, there’s certainly value in creating a ‘fun’ work environment to boost employee engagement. Whether your company’s incentives are fun or financial in nature, it’s important to remember there’s no one-size-fits-all plan that’s going to work for everyone. Beyond that, boosting employee engagement and driving ownership thinking takes more thoughtfulness than building a fancy break room or handing out some extra cash. Let’s take a look at what it takes to build a solid foundation for any incentive plan, the different types, and what business leaders need to keep in mind.

Define Your Business Goals and Plan Goals

While it seems obvious, employee incentives must actually provide incentive, and this is often where companies miss the mark.  In order to build an effective incentive program, you must first figure out what behaviors you’re trying to promote. Whether it’s an increase in sales, bringing on new customers, or a reduction in costs, there should be a clear connection between the goal and the incentive, and it must be clearly communicated to employees.

In addition, sometimes the unintended consequences are not well thought through. The goals themselves and the clear communication of expectations of how an employee is expected to impact those goals are critical to the effectiveness of incentives. If an employee does not believe they’re able to affect results, the incentive will not positively influence the employee’s behavior. For instance, if improving profitability is the goal, and the company is offering a bonus for success, an employee’s behavior will not change if their job has no ability to impact the goal. Similarly, will employees sacrifice valuable activities (maybe sales and marketing expense) to improve profitability? The communication of expectations and sometimes multiple incentives can help align behaviors to achieve the company’s goals.

Align Incentive Plans With Company Culture

Any incentive must be authentic and fit into the company’s culture. If a company is focused on increasing revenues, then activities held during business hours may feel an impediment to get their work done. Alternatively, employees with families or other commitments may need to be home in the evenings. So how do you craft incentives that work for everyone? The answer is likely a mix of incentives that each align with the company’s culture and collectively create an overall feeling of valuing the individual employee’s needs both at work and outside work.

They must align with the direction the company is going and must fit the company culture as well.  In some cases, transparency and vulnerability rule, while in others, limited but clearly stated information is sufficient.  Regardless, the most critical factor is communication and expectation setting.   Help your employees know what they need to do to achieve the goals, coach them on how to excel, and keep them apprised of how they are progressing.  These steps by management are as impactful as the amount or type of incentive.

The Real Value of ‘Fun’ Incentives

Let’s look at the ‘fun’ perks that are highlighted in the press. What are the goals of these incentives? Generally, these are touted as tools to enable employees to enhance collegiality and to have fun at work. This is important, but I think the strongest position for these perks is the fostering of trust of employees. “Take a break and play some ping pong. We know you’ll get your work done.” “Unlimited” vacation and flexible time carry the same message and are incredibly valuable to many employees.

As business leaders, it’s tempting to spend a lot of time and money into creating a ‘fun’ work environment with exciting amenities, but effective application is truly dependent on building an environment of trust and reward for a job well done.

Choosing the Right Financial Incentive

Just like the ‘fun’ incentives, the financial incentives are critical to growing a company in the “right” way for your goals. Though financial incentives can vary greatly, most businesses choose to utilize performance bonuses, profit sharing, and stock grants or options.  Of course, there are many more.  But let’s look at how these play into the criteria of truly supporting performance goals and aligning with company culture.

Performance Bonuses

Whether subjective, objective or a mix of the two, the most critical factor in instituting a performance bonus is that an employee knows what they must accomplish to achieve it. In my corporate days, there was a range of salary that could be achieved as a bonus.  We completed a form setting forth goals and at the end of the year, we shared whether we achieved them and the manager did the same.  The process always seemed pretty subjective and, therefore, wasn’t terribly motivating.  On the other hand, if the measurement was objective and I was apprised of my success on a regular basis, I might change behaviors to achieve it.  Of course, the amount of money at stake is important as well; it must be a sufficient amount to motivate a change of behavior.

Profit Sharing

Profit sharing is often attractive to employees because it feels “fair” and it’s objective.  However, many employees recognize that management truly has the power to influence profitability.  When it comes to the need for capital expenditures or other investments, does the management team put the profitability first or the business’ need for the tools?  There’s a conflict of interest; but management must recognize that it is trusted to do the right thing for the business and the employees.  A profit sharing incentive must clearly define the ‘ground rules’ around how profitability is determined and recognize that the business must invest in both expected and sometimes unexpected costs.  Transparency and regular updates on progress are important to the success of profit sharing.

Company Stock

Companies are often ready to offer stock because it doesn’t require a cash outlay.  From an incentive standpoint, though, it doesn’t often carry much weight.  The positive spin is that it helps employees feel a part of the bigger picture, a share in the pie.  However, this only works if the company is planning to sell or if the company regularly pays distributions or dividends to owners.  In many small businesses, there’s no exit plan and money is reinvested into the business rather than being distributed.  In my opinion, except in situations where there’s a clear exit plan, stock should be reserved only to those who are truly invested for the long term in the business – “business partners”.  The average employee will not be motivated by the stock because there’s no foreseeable cash value to that stock.

Summary

Your employees have the ability to grow your business and foster success, but as a business leader, it’s your job to communicate what success looks like and your responsibility to motivate your team to achieve their goals. Whether you choose the ‘fun’ or financial route when it comes to incentives (or a mix of the two), it’s essential that the activities selected are actually meaningful to your employees and you implement them in a way that aligns with your company’s culture.