- Blog post
Guiding Principles for Employee Incentive Plans
Get a High ROI from your Employee Incentive Plans
Employee compensation sin number four is the failure to design effective employee incentive plans. Now anything you do in terms of employee incentive plans has to consider the company’s return on any compensation expense. Essentially, that’s what compensation people do. They try to get the greatest return on investigation for the compensation expense. All employee incentive plans should be viewed as an investment. Not an expense but an investment.
An organization literally starts with people. Without good people doing good things, the company would not exist. Your job is to get the greatest return you can for the company on the resources you spend as a manager which includes compensation expense which if you’re like most organizations, it’s probably the largest expense by far that your organization has these days. So it’s a big responsibility.
Within this context, you can get the highest return from your investment in employee incentive plans by following these general principles.
- Operate with as few people as possible. And there are some limits on how far you can push any of these principles. Why few people? People cost a lot of money. So it’s no secret to me why when companies need to reduce expenses to shore up profits, the button that they push is layoffs. So operate with as few people as possible. In some cases though, you need to add people in order to grow business. Look at revenue per employee for a particular company in order to determine whether the time is right to add people. If that number is increasing, it’s a good time to be adding people. If it’s decreasing, it may not be a good time to add people.
- Offer better than average compensation opportunity to the people that you do retain as employees. The reason being is that most of the research seems to indicate that those employees who are truly exceptional can do almost twice the work as an average employee. And you only have to probably pay them maybe 30%-50% higher than what you would pay an average employee. That sounds like a pretty good return on your investment. Even a good employee who can do 150% more is more productive than an average employee. And you may only have to pay 15% or 20% higher than an average employee. So getting good people is a smart thing to do to maximize employee incentive plans. And you’ll notice the word “opportunity” because what you’re dealing with here is not guarantee. It’s opportunity.
- Put as much of the total compensation package in variable expense as you can. And that’s as opposed to fixed expense. Fixed expenses are your base salaries, which hardly ever go down. The more you can put into variable expense, meaning things like bonus or incentive programs and stock programs, the better it will be for the company. And which means that the expenses for employee incentive plans would vary based on individual and company performance. There are some limits though as to how far you can push things in each of these areas. For example, you don’t necessarily want to offer 25% base salary rate for some and load them up on incentives because it will speak to a lot to the type of person you’re able to attract under those compensation arrangements. But to the most part, if you follow that, you’ll get more bang for your buck going forward.
Edited Remarks from “The Seven Deadly Sins of Employee Compensation Plans (and How to Fix Them)” by Rick Olivieri