Regan McCracken provides his tips for creating a fair, equitable, transparent and achievable incentive scheme.
We all agree that incentive programs are put in place to both motivate and retain staff.
There’s a balance to be struck between motivation and retention, some of which was covered in the previous article in this series, The Challenges (and Nightmares) of Maintaining Incentive Programs . But a successful incentive program will ultimately seek to motivate new and existing staff, improve long-term staff retention, and thereby increase the stability and performance of the organisation over time.
The first point I’d make here is that any incentive program needs to be achievable. This may seem obvious, but too often I’ve seen otherwise well managed, well-structured incentive programs fail because they were – or at least were perceived to be – unattainable.
Incentive programs should also be equitable. Staff know that if they do well, they’ll be rewarded, but also that bonuses and incentives are not a given; they need to be earned. This should be the case whether you’re a rep or a manager.
A key feature of any successful incentive program is clarity on what an employee needs to do to qualify, and which factors are in or out of an employee’s control. For example, while an employee can – and should – be able to control his or her own sales performance and execute their activity plans, other factors, such as total company performance, can be a partial determinant of the final incentive outcome.
Sometimes these external factors can account for 15% or more of the outcome, and so, no matter what your position in the organisation, you want to know what is directly within your control as well as indirect factors (such as subjective individual performance assessments and total company performance) that the whole organisation is striving to achieve.
In doing so, an equitable incentive program will seek to find the right balance between objective (results) and subjective (appraisal) factors. Often subjective factors can have a significant effect on the final reward, so it’s vital that employees understand how these subjective factors are measured, who measures them, and what their direct relationship is to that person or persons.
That said, no matter the weighting of factors or balance of control, an incentive program’s goal must be achievable. For example, an incentive program that requires you to achieve 130% of your target in order to qualify would be considered by most people unattainable, and would be more likely to cause a mass walkout than motivate your staff to try harder.
The objective and subjective factors of an equitable incentive program must be within reach of the individual. Large teams in particular will often have a spread of achievers, from low to high. Those that go above the mark need to know they’ll be appropriately rewarded for their efforts, and those that struggle to make their mark need to know there are systems (such as ‘catch-up’ or ‘claw back’ programs) in place to help them make up the shortfall over longer periods.
In most organisations there’s an entry point below which no one receives a bonus, for example, less than 85–90% of target. There is then a sliding upwards scale up to 100%, and beyond 100% there’s usually an exponential multiplier, usually capped at 130%. In this way you need to show a certain flair for the role to achieve reward, but the company is protected so that you can’t go too far beyond what’s realistically attainable (and affordable) to the organisation.
While we’re on the subject of clarity and equitability, any qualification or entry points to an incentive scheme must be clear. Not only does everyone need to know the weighted qualification points of the scheme, but they also need to be clear on eligibility to participate in the program. For example, most organisations have a probation period (up to six months in some cases) before which entry to an incentive scheme is closed or limited. Importantly this needs to be clear for new starters as well as people changing roles inside the same organisation (eg: a Sales Rep moving into a Manager role), especially where different departments are governed by different schemes.
For new starters there is always some trepidation regarding what type of territory they have inherited, often referred to as the ‘carry-over effect’, where a new employee joins a company in a territory or market that’s either over-performing or under-performing. An employee may have inherited a role where momentum is already in place and performance all but assured whereas others may face market share saturation with limited opportunities for growth. This is often considered a factor outside the employee’s control, but at the same time can work to his advantage or disadvantage and may result in discretionary incentive adjustments.
Remember that people are not looking for the same target, but a fair target that reflects the opportunity within their sphere of influence. An incentive goal should be based on logic and be auditable and explainable by both the rep and management.
Communication is key to managing a fair and equitable incentive program, as is transparency. People need to know that if they’ve had a bad quarter or cycle, that catch-up programs are available.
In summary, an incentive scheme that doesn’t take any of these factors into account and does not motivate personnel to achieve their best is likely to result in unhappy staff, and a company with high staff turnover. Conversely, a fair, equitable, transparent and achievable incentive scheme is critical to motivating and retaining employees and driving business growth.
About the author
Regan McCracken is Director – Commercial Effectiveness, Mercurial (www.mercurial.com.au)