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THE IMPACT OF INCENTIVES AND BONUSES ON THE BOTTOM LINE
We recently had the good fortune to conduct what we believe to be the first significant survey of incentive and bonus practices in small to medium-sized entrepreneurial companies. The Impact of Incentives and Bonuses on the Bottom Line is a survey sponsored by The Executive Committee, an international organization dedicated to increasing the effectiveness and enhancing the lives of CEOs. Over 300 companies in the U.S. participated in the survey. Median sales were $15 million; with median employees of 100. We analyzed how plans are designed, how they fit with business strategies, what kinds of results are achieved and what lessons the CEOs learned. Here are some of our key findings.
KEY FINDINGS
- Incentives/bonuses are introduced to improve
business results, encourage teamwork and pay for performance
- The majority of CEOs believe they achieved not only these objectives, but also additional benefits, such as varying labor costs with results, and helping employees understand business goals.
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Size and success of company, as defined by sales, employees and profitability, have little relationship to plan success or payout levels
- However, sharing financial and business data with employees does improve plan results; the more frequent the communication, the more successful the plan
- This is encouraging. Open book management
may be scary and hard work, but it is in a company's best interests
to have employees who understand business and financial data and
the impact they can have on these areas.
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Financial measures, such as profit or revenue, are the most prevalent performance criteria used in incentive plans
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It is interesting to note that customer service ranked as the second most important business goal, but was used in only 28% of plans.
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All employees are eligible for incentives in almost half the participating companies. However, the majority of incentive plans are add-ons to current pay programs. Less than a third of participants put any pay at risk
- Perhaps this is because of the difficulty
of changing employee expectations about pay and ongoing increases.
However, we believe the message needs to be clear: employees and
organizations must share both the upside rewards and the downside
risks.
- Perhaps this is because of the difficulty
of changing employee expectations about pay and ongoing increases.
However, we believe the message needs to be clear: employees and
organizations must share both the upside rewards and the downside
risks.
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Almost half the plans pay out annually
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These companies may be missing an important opportunity to reinforce results and performance in a timely manner. More frequent payouts reinforce strategic direction and provide a way to communicate and/or celebrate on a regular basis.
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Most plans are designed by the CEO which may help explain why 88% believe their plans are successful
- We believe organizations should use this opportunity
to increase buy-in, credibility, and a sense of ownership by involving
employees in the plan design process.
- We believe organizations should use this opportunity
to increase buy-in, credibility, and a sense of ownership by involving
employees in the plan design process.
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The majority of companies provide recognition awards, with an average of three programs per company
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These programs recognize customer service, longevity, quality, productivity and teamwork.
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LESSONS LEARNED
CEOs were asked to describe the most successful practices and the biggest mistakes they made with incentive plans.
Successes can be categorized into four major areas:
- Link incentives to the company's business results.
- Tie the plan to clearly defined performance measures.
- Communicate as much and as frequently as possible and share financial and business information.
- Involve employees in the process.
The biggest mistakes were perceived to be:
- Insufficient communications and feedback.
- Lack of alignment with the business strategy and objectives.
- Using discretionary measures.
- Setting unrealistic goals.
CONCLUSIONS
There is much talk today about the effectiveness of incentives, with proponents on both sides of the discussion. Much of the talk centers on the motivational impact of incentives. While motivation is, of course, a key element, there are other catalysts pushing companies to change the way they pay employees.
Not the least of these is the critical need to have flexible and variable cost structures. For most organizations, compensation is the largest element of operating costs. If business dictates a cost reduction, companies are forced to reduce labor costs through layoffs.
However, the CEOs in this study are changing the way they view people and pay -- away from traditional, cost-of-doing business programs to those that link employee and organization success and vary rewards with results and performance.
