- Blog post
Three Principles for an Effective Employee Incentive Plan
Make the Employee Incentive plan work for your company
So, in order to do work in the sales or in the compensation area, you have to have some sort of underlying principles or philosophy about you employee incentive plan. It comes down to three general principles that, if you follow, will get you the greatest return on investment for every dollar you spend on an employee incentive plan.
Operate with as few people as possible. And, there’s a reason for that. People cost money. And it’s no secret that when the economy turns down or business is bad for a company, one of the first buttons they start to look at is the button for layoffs and that’s because people are expensive.
Layoffs are a very quick way to reduce expenses very quickly. And, we all know, revenue minus expenses equals profits. And, profits drive stock prices. So, revenue minus expenses including compensation expense, drive profits which eventually will drive stock prices. So, operate with as few people as you possibly can.
Provide for the people that you do retain as employees provide better than average pay opportunity.The reason I say that is the research seems to indicate that truly exceptional people can do almost twice the work as an average employee.
You may, however, have to pay 30% more in compensation expense to getting that truly exceptional person. If that’s the case and they really can do twice the amount of work as an average person, you come out ahead by going for the truly exceptional people.
Now, you may not be able to get truly exceptional people in every case. But, if, you can even get good people, they can do one and a half times what an average employee can produce. And, at the same time, you may have to pay 10% maybe 15% higher to get truly good people. But the numbers work out in your favor that you will have a higher return on your investment.
Put the total expense of your employee incentive plan to the company’s advantage. Put as much as you possibly can into what’s called variable expense, compensation expense as opposed to fixed compensation expense.
Fixed compensation expenses are things like salaries and most benefits. They don’t necessarily – no matter how well the business does, good or bad, you’re going to spend the same amount of money on these expenses. If business takes downturn, you’re still stuck with paying that part of your employee incentive plan.
Variable expenses are such things as bonuses or incentives and stock. Meaning that the expense is associated with these types of programs, actually vary with the fortunes of the company. So, that when business turns down, the company is not stuck with a lot of fixed expenses, the variable expense will vary with the business – the business performance.
So if you can follow those three principles in general that you’ll be on the right track of getting the absolute most that you can from your employee incentive plan.
Edited Remarks from “Incentive Talk: How to Design an Incentive Plan that Works for – Not Against – Your Company’s Goal” by Rick Olivieri