How to give your incentives an MOT
When did you last do a health check of your incentive schemes?
If it’s been a considerable length of time and you have seen stagnation in business growth or a drop in levels of employee engagement, and you can’t quite put your finger on why, one area you should consider reviewing is the structure of your incentive schemes.
Clients often come to us with these issues, and through carrying out a ‘deep dive’ review and analysis, coupled with our experience of best practice across sectors, we identify potential sticking points and inconsistent measures which may inadvertently be driving ‘wrong’ or negative employee behaviours.
Far from contributing to the success of the organisation, your incentive scheme may have quite the opposite effect.
Here we’ll look at three factors to bear in mind when designing a new incentive scheme, or when reviewing an existing one.
It is important to be clear what purpose an incentive scheme serves. By its very definition, an incentive scheme should encourage or ‘incentivise’ certain behaviours, the results of which are pivotal to organisational success.
The starting point for this is to set targets at an appropriate level – both what needs to be done to achieve a payment (performance targets), and the size of payment awarded to employees for success (individual targets).
A benchmarking exercise should be carried out to ensure individual target pay outs are set in line with the market and competitors.
We recently worked with a client whose target pay outs were set well above the market median across nearly all sales roles. When we analysed the data, it turned out that despite being well ahead of the market in terms of incentives, they were positioned low to the market for base pay. Consequently, it appeared that they were well aligned to the market for total cash.
Although from a cursory glance this may be ‘fine’ as the client was in line with the market in total cash terms, there were several unintended consequences of this skewed ratio between base and variable pay:
- The link between performance and reward was diluted
As the incentive scheme was being used to ‘top-up’ below market base pay (and in some cases, even communicated to employees as such), the link between having to achieve a certain level of performance to trigger the pay out was weakened. Effectively incentive payments were being awarded just for ‘turning up’. The distinction between base and variable pay was blurred and the incentive scheme was no longer a driver for performance.
- Issues with recruitment & retention
This skewed ratio could also contribute towards difficulty with recruiting and retaining employees. Whilst for some the potential of a generous bonus payment would be attractive when looking for a new role, for most the priority remains guaranteed cash. With base pay set below the market median, you are effectively limiting the size of the talent pool you can fish in. Equally, incumbent employees may have their heads turned by the promise of a larger guaranteed salary from a competitor.
- Lack of clarity for employees, resulting in disengagement
The net result of this is that employees had historically received mixed messages as to what the purpose of the incentive scheme actually was, what behaviours and actions it was supposed to reward, and an overall feeling that allocation of bonus payments was something that they were not in a position to influence.
The advice when setting performance targets is that it should be achievable but a stretch to reach target, and only the highest performers should be able to overachieve. Too easy and employees will take it as a given; too hard and employees will simply see it as unachievable and become disengaged. Either way, this will not drive a sustained level of high performance.
Allied to the above in terms of setting targets, make sure the measures used to determine the size of bonus payments are appropriate for the role and level, and most importantly, that they align to the overarching objectives of the organisation or business unit.
Humans are simple creatures and at the basest level we will do whatever we have been given encouragement (or incentivised) to.
Bearing this in mind, it becomes of paramount importance to review the measures of success for your bonus scheme regularly, in line with both the stage the company is at in the business life cycle and the overall strategic direction of the business.
As an example, we had a client in the FS sector who were struggling to win new business, and had concerns surrounding the sustainability of this in terms of future growth.
When we looked at what could be driving this, we found that employees were being disproportionately rewarded for retaining existing business against seeking out new customers – so from an individual employee’s perspective it was far more beneficial in terms of reward, and much easier in terms of effort, for them to service the clients where they had an existing relationship, rather than spend time building relationships in an effort to win new business.
Once we had played this finding back to the client, it transpired that this element of the scheme design was a hangover from when the company was in the early stages of growth and couldn’t risk losing customers. They needed to concentrate on retaining customers, so weighted their bonus scheme accordingly.
Unfortunately as the business matured and the strategic priorities shifted to a more even balance of retaining existing custom and generating new business, the incentive measures were not reviewed in line with this – meaning employees continued to concentrate their efforts on servicing their existing portfolios to the detriment of seeking out new business.
For this client, a simple tweak to the balance of the measures used in the incentive scheme whereby employees were rewarded equally for generating new business and retention of existing business could have a significant effect in terms of overall growth.
Clarity & Communication
I’ve saved arguably the most important point until last. Even the most carefully considered and designed bonus plan will not drive your business forward if it is not clear to employees what success looks like and what they need to do to achieve it.
It is important to get employees engaged and excited about the potential of your incentive scheme, and what it means for them in terms of cold hard cash, so they are driven to perform – which after all, is the entire purpose of a having a scheme in the first place.
This starts at the most basic level with raising awareness of your overall mission statement – from here it is a case of cascading objectives through business units and teams to individual employees. Employees feel engaged when they feel their work is meaningful – and this is aided when they have a clear line of sight between their day-to-day contribution and the overall objectives of the business.
The bottom line is that if employees are not clear on what they need to do and why, then ultimately you run the risk of them not doing anything at all.