Creative Incentives – Part I

By John A. Haas
Management Strategies Group

Regular readers of this newsletter know that I have written several articles about the strategic and tactical benefits of well-designed and well-implemented performance-based incentive compensation plans.

Ultimately, the purpose of establishing an incentive plan is to improve the chances that business goals will be met. Incentives help focus participants’ efforts and align their interests with those for the business. Participants are rewarded in direct correlation with meeting or exceeding business goals.

Here are some interesting twists to help assure participant efforts reflect business priorities.

Increase Payouts at an Increasing Rate

The intent is to increase efforts to achieve higher performance levels. For example:

 So generating $235,000 of gross margin of would pay $22,000 commissions.

Pay for Cost Reduction

Useful for reducing controllable costs. For example, driver carelessness or neglect was generating extremely high unplanned repair and maintenance costs to trucks, equipment and property. To control these, drivers were offered temporary incentives:

• $25 per week for $0 unanticipated costs.
• An additional $50 for $0 unanticipated costs for 4 weeks ($150 total).
• Another $100 for $0 unanticipated costs for a quarter ($550 total).
• For “minor” unanticipated costs (to be defined), drive r must “earn” the equivalent of those costs to again be eligible for this incentive.
• For unanticipated costs that exceed “minor,” driver must earn the equivalent of $X to again be eligible for this incentive.

These are examples only, and would normally be part of a more comprehensive incentive plan. But they do suggest ways of changing behavior, benefiting the business and reinforcing the need through compensation that participants can control through their own efforts.

Summer 2006 -Volume 16, Number 3

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