Incentive Comp Plans: Does They Does or Does They Don't?

Nov 1, 2008

I met with a Lucidity client this week, and the topic was incentive compensation plans – you know, sales commissions, executive incentive plans, MBO plans, marketing bonuses, engineering project completion bonuses, etc. – where some portion of the employees’ pay is dependent on performance, effort, or results,. After discussing a lot of mechanics and implementation and algorithms, we came around to this deep philosophical question (it was, after all, a Friday afternoon): Do these plans really work? Or are they just an expensive, distracting management exercise that motivates, if it motivates anything at all, behavior unrelated to real company success?

My emphatic answer to this question is YES. Variable compensation plans work great, provided you remember these three verbs: Spell. Tell. Sell. The rhyming should help a little, but here’s more on the whys:

First, SPELL out the most meaningful measures on which to base incentive compensation. What are the measurable and controllable results really related to company success? Are there enough metrics so employees don’t ignore important stuff? Are there few enough that each single metric has meaningful dollars tied to it? It’s just amazing how many companies skip this step, and go straight to the spreadsheets and legal documents.
Next, TELL the plan participants how the plan works. If the objective is to motivate behavior, what’s the point of implementing a plan that your employees are unaware of, or don’t understand? Does the participant have enough information to make a direct connection between effort and dollars? It’s just amazing how many companies are really sloppy about explaining these important, expensive plans to their people.
Lastly, SELL the plan to your employees. Get them charged up! Help your employees, and especially your best performers, see that they are better off working for you than for a competitor. Moreover, going to the effort of providing a plan that directly ties individual success to corporate success, at all levels in the company, is an important gesture of respect to your people. It’s just amazing how many companies completely ignore this step.

So repeat after me: Spell. Tell. Sell. And please, do it in that order!

“Painting with Numbers” is my effort to get people talking about financial statements and other numbers in ways that we can all understand. I welcome your interest and your feedback.