Money motivates.

What a title.  Of course money motivates.  But there is more to it then this.

Salaries or hourly wages must be within reasonable limits set by the industry and matched by the competition, both regionally and for the same job classification.  But more difficult is the sticky issue of employee incentive compensation.  I find that this is an area much more often the subject of a CEO phone call, a roundtable discussion, or a board compensation committee meeting.

There are many studies that can tell us how various industries reward employees for achievement above a base pay, or beyond expectation. And there are some industries money1where tools such as stock options are considered mandatory for a company to be competitive.  But how about listing the basics for designing an excellent incentive compensation program?  Here are several, gleaned from numerous companies and systems of compensation.

[Email readers, continue here…] First, be rule specific.  A bonus or commission that is granted after the fact, without a target plan or without objectives to meet, is surely appreciated, but does not often create an incentive to exceed, only an expectation of receipt again in the next period.  When a leader and a subordinate agree upon a list of achievements in advance, then good performance can be rewarded based upon a fair assessment of accomplishments against those achievements.  And if those goals are aligned with those of the overall corporation, everyone wins and the process can be repeated in subsequent periods.

Second, there should be a substantial carrot, or upside bonus for outstanding achievement.  A sales commission plan should reward a salesperson with a combination of salary and commission up to the expected level of performance, often called a quota.  Perhaps a part of that compensation plan should include a bonus upon achievement of quota, as a form of recognition and celebration.  Then, contrary to popular thinking, there should be an increasing reward for achievement above the expected number, beyond the list of agreed-upon incentives for non-commissioned employees.  For a salesperson, the commission percentage should increase above quota, and a second level of bonus available at some higher point.  Sometimes, a combination of revenue, gross profit and even operating income form the basis for individual and team rewards.

Next, some form of rewards should be designed to be immediate.  Rewarding a February achievement in December disconnects the reward from the event, reducing the effect of the reward itself.  If we believe that money does motivate, then we should reward positive behavior immediately to reinforce that behavior.

Finally, and perhaps most difficult to design, there must be protection against workarounds or from employees gaming the system.  Reward only gross revenues, and salespeople will push the limit of profitability, impacting the corporation but not their commissions.  Real estate agents are paid as a percentage of the sale, not upon its relationship to the asking price.  Sometimes, agents push their clients to accept low offers to assure a quick closing of a deal, since their participation percentage is only slightly affected by a price cut to close the deal quickly.

There are more insidious ways to game a compensation system.   Wall Street brokers helped to create the financial crisis by following a bonus system driven by quantity, not quality of trades.  Salespeople paid entirely upon closing a deal will care less about the subsequent completion of a complex, time-consuming transaction.  Support people paid based upon the number of tickets closed will rush to close tickets at the expense of quality service.   There must be thousands of such examples where poorly designed systems allow employees to achieve personal goals that are at odds with the best interest of the corporation or its customers.

So use these four items as a checklist as you create compensation plans for various levels and types of employees.  Rule specific; substantial upside bonus; immediate rewards; protection against working around the system.

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