Incentive Programs

Incentive Programs: Ten Facts of Life

When an incentive bonus program fails, it can usually be traced to a lack of understanding of what makes bonuses a powerful profit strategy. At the end of each fiscal year, countless firms trot out a litany of reasons why bonuses can't be paid once again:

	The firm didn't earn enough profit (Sounds like some top managers screwed up to me).
	Another office, division or department lost a lot of money (Why should someone else's loss eliminate bonuses for those who made outstanding contributions?).
	The firm is investing in more computers, software, opening offices, etc. (Yes, these excuses have been made by some firms to explain why bonuses weren't being paid out, again).

Bonuses Work, But . . .

Is it any wonder that employees in many firms yawn when managers talk to them about increasing profitability to earn bonuses?

Incentive programs do increase productivity, profitability and key employee incomes if they are properly designed and implemented in parallel with effective business strategies and day-to-day procedures.

Introducing incentive bonuses with simultaneously introducing more effective business-oriented procedures may cause employees to waste less time and perhaps even work harder. However, your best employees are probably already working as hard as they can, and using the only procedure they know.

Since most A/E/C employees have never been taught how to optimize their economic output (i.e., Work smarter so that their companies earn more profit), managers should view this as a win-win profit opportunity, and capitalize by helping their subordinates to earn higher bonuses.

Making subordinates more successful is an important part of every manager's job. However, dangling potential bonuses in front of employees that require them to reach targets they believe are too difficult to achieve however, is likely to backfire.

Such tactics are frequently perceived as a way to get more work completed without actually paying bonuses: the 'make me look good with your disappearing bonus' trick.

Fortunately for most firms, the fundamental bonus, productivity and profit problems can be solved, and employees, including managers, can 'earn' bonuses by increasing both productivity and contributions to overhead and profit.

Although each firm is unique and some problems may require special solutions, the following facts of life should be helpful to A/E/C principals as they evaluate the success of their own incentive bonus programs:

Ten Facts of Life

Money required for bonuses come from profit which belongs to shareholders. It should only be invested in bonuses if it will increase shareholder wealth and/or financial security.
If bonuses are distributed too widely among employees, the individual bonuses are invariably too small to act as profit motivators.
Small bonuses for outstanding performers are inadequate rewards that probably act as demotivators, and do not motivate continued high performance.
Bonuses should be at least 10 percent of an employee's annual salary, and preferably much higher, if the bonus is expected to motivate continued high performance again next year.
Bonuses distributed to most employees as the 'same percentage of annual salaries' become an entitlement after two years and do not motivate high performance.
Firms cannot continue to pay out large bonuses unless they generate high profits in most fiscal years.
Executives, branch managers and other key employees such as chief engineers, principal designers and business developers have greater impact on a company's success than employees performing roles at lower organizational levels, so naturally they will be eligible for bonuses, and their bonuses should be larger than many other employees.
Outstanding performers' income packages should include a market-related salary, the opportunity to purchase shares in the company, and an outstanding incentive bonus.
An out-of-date business culture can mask unacceptable productivity levels and dangerous marketing problems, both of which contribute to reduced profit and small or no bonuses.
Some employees believe that they are already working very hard (input) and should receive a bonus when their performance level (output) is actually less than adequate.

by Kenneth J. Barlow

Originally published June 1997 by PSMJ.

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