When companies are looking for ways
to curb spending, it’s hard to justify
an overreaching employee bonus program. But cutting out bonuses altogether
can impact morale, employee motivation and
retention. Instead, what most incentive programs need is a hard look and a more structured framework.
“Sometimes, it’s hard for business owners
to sit down and go through the budget
process, but it can be very simple,” says Bob
Holden, senior vice president of the
Employco Group. “The trick is to set individual goals that are directly related to the overall company goals.
Smart Business learned more from Holden
on how to build a more appropriate and
effective employee incentive program.
How should businesses approach employee
incentives?
There are different kinds of incentive programs. There are merit-based performance
programs where employees are given an
increase based on their individual work performance. Typically, it’s a percentage of their
base and revolves around the performance
appraisal itself. There are dollar bonus programs based again upon individual performance, also tied into corporate performance,
which you can measure a couple of ways —
by actual profit dollars, by revenue growth or
by different goals that have been set for an
individual, i.e. client retention or entry into
new markets.
The management team and/or owners
must put together the annual budget, typically during the quarter before the firm’s fiscal
year. One of the components of the budget is
the salaries and the associated benefits, so
when companies budget that out they know
what they’re going to spend. This should be
based on the performance of the organization. A good organization will pay out bonuses when the company itself does well. It may
not make sense to pay out bonuses if you’re
losing money because you’re rewarding poor
individual and/or company performance.
During the budget process, management is
forecasting what it believes profits will be —
either the return on investment, return on
equity or client rentention. Once they’ve
established what the forecast is, that represents a pot of money to use when devising a
goal-setting process for individuals and/or
departments.
How should incentive programs be structured?
Businesses should develop a performance
appraisal process that has a goal-setting
piece to it. Set up a weighted matrix where
you can say: If your client retention is 100 percent, that’s worth a rating of an A; if you’re at
75 percent, it’s a rating of a B; if it’s 50 percent,
it’s a rating of a C. You take those weights and
then figure out how they factor into not only
the total pot but how do you transfer that
down from a department to an individual.
Each department in a company affects the
ROI of the businesses. How do department
goals tie into the success of the overall company goals? How does the individual affect
both the department goals and the company
goals? And you set up a matrix based on that:
The company has to do X. If the company
does X, you take the next step. Then you
decide based on the matrix and the importance of each department what pot of money
should be worth going to each department
and the individual.
What if individuals or departments meet
goals but the company does not?
If everyone is meeting goals and you set the
goals properly, the company should be at an
A level, unless it’s beyond individuals’ control, which can happen in a tough economy.
Management should communicate to
employees that when the ROI of the company is 100 percent, the pot may be X. It will be
a different amount if the ROI is 70 percent or
50 percent. If there is no ROI, then based on
what the goals of the individuals in the
department are, you can give a small bonus if
fiscally possible, because you don’t want to
penalize the A performers. But you have to
build that into your budget process prior to
that situation revealing itself. In this economy, many businesses do not have that luxury.
You can have two pots: one for a merit
increase when somebody gets their performance appraisal, and a cash dollar bonus
incentive, which can be given monthly, quarterly or yearly based on the company, department and individual performance.
How should CEOs set goals and communicate financial information to employees?
As far as the ROI and revenue goes, you certainly should have a quarterly meeting
describing revenue goals for each quarter.
This way everybody knows from a corporate
perspective where the company is and what
that means to their overall goal effort.
You can do a goal-setting process that sets,
for example, three goals for the year. If, for
example, in a firm that processes payroll as
on outsourced service, a payroll person is
working hard on quality; that means customers aren’t complaining and are less likely
to leave. Client services, for example, should
make multiple visits per year per client to
review a certain array of various topics that
are of concern to their client base. There
should be a measurement system in place so
you actually know when a complaint comes
in. So those are the kinds of goals that you
can set that help with client retention and tie
into overall performance, even when they’re
not money or commission driven.
BOB HOLDEN is the senior vice president of the Employco Group, a division of The Wilson Companies (www.thewilsoncompanies.com).
Reach him at (630) 286-7399 or [email protected].
