A Primer on Management Incentives

By John A. Haas
Management Strategies Group

Experience consistently shows: management incentives work!

Let’s assume that managers and employees come to work intending and motivated to do a good job. Business plans and budgets define specific performance goals for the next time period. Incentive earnings then depend on actual vs. planned results. So incentives define a “good job” and will guide participants’ behavior.

Well designed and implemented, the incentive plan will help assure desired results. If poorly designed or implemented, it will lead to undesirable consequences and unintended results. Either way, they “work!”

• Develop and present incentives as a natural extension of your business planning process, using measures already important in managing your business.
• Assure participant goals are clearly relevant to overall business strategies, limited to <5, expressed in measurable terms, weighted by importance and credible.
• Ability to track and regularly report progress vs. goals.
• Partially tie participant goals to overall profitability, but most goals should be within each participant’s ability to directly influence outcomes through their own efforts.
• Ask each participant to propose their own performance measures, weights and performance targets for the next period. This creates “ownership.” Final elements to be discussed with and approved by managers.
• Assure goals are mutually consistent. Schedule meetings for peer participant groups to share their own performance goals and weights.
• All participants must know exactly how to calculate their incentive earnings and how and when incentives will be paid.
• Make clear that all incentive compensation plan elements are subject to review and change at the end of each performance period. Communicate any changes before the next period starts.
• Have legal counsel review the plan design and documents to avoid any unintended consequences.

• Communication is the key. Participants must be thoroughly familiar with plan mechanics and how they can influence their earnings.
• Introduce the new or revised incentive plan in peer meetings. Review one or more examples and allow plenty of time for questions, comments and discussion.
• Prepare and distribute participant booklets at meetings. These should include examples and clearly state all the plan elements, the update process and administrative guidelines.
• Set up administrative, tracking and reporting systems in advance.

• Are participants paying attention?
• If participants try to “beat the system,” are they doing just what they should be doing?
• Is the company or unit performing better?
• Are you happy with what you’re paying out?
• Are the best performers earning the most?
• Are your long-term interests being protected?

Fall 2000 - Volume 10, Number 4