Creating Meaningful Incentive Plans

Dr. Merritt,

I attended your recent day-long session in Detroit on Leadership and Strategy. You were great. In one section, you spoke about creating meaningful incentive plans for high-performance individuals. We have always used bonus pools that are distributed across teams that do well. Can you expain your twist on this concept in more detail?

Thank you,
Alex D.

Alex,

A well-designed incentive plan has one main objective:

It enables the organization to stimulate its general manager or other key executive(s) to focus his or her efforts in directions that will profit him or her while dramatically improving company performance.

Types of Bonuses:
(Note: Remember that I am discussing incentive bonuses and not earned commissions or gratuities in the following paragraphs.)

--Discretionary bonuses are uncertain and create suspicion about the method of distribution. A bonus should be tied to measurable performance (objective measures). Objective measures are those items that can be either timed or counted.

--Fixed bonuses, whether paid to individuals or teams, can become too expectant for average performance since they are paid irrespective of organizational results.

--Individual bonuses reward those charged with budget (income and expense) responsibility.

--Office-wide, department-wide, or team bonuses can foster team spirit, but can also become a dis-incentive to high-performance individuals that have the most direct effect on the budget.

Bonuses should reward superior performance above some baseline of performance which is established in a mutually agreed set of measurable goals and objectives in advance of operations.

Bonuses should be paid semi-annually or annually to even-out peaks and valleys during the year and to serve as golden handcuffs—if the manager leaves during the period, he or she is not eligible for a bonus at the end of the particular period (nor a pro-rata share).

I speak and write a fair amount about objective measures as being highly desirable over subjective measures. The point is to ensure that your direct reports are speaking and reporting in objective format. Here are a few examples to illustrate the difference:

1. Subjective examples are textually vague and imprecise: "We had a very good month and sold a lot of real estate last month. Prospect counts were up and it took less time to convert a prospect into a sale."

2. Objective examples are precise and help provide comparisons: "We had a very good month in March and sold $110 million in real estate versus $79 million last March (which was our record to date). Prospect counts were up for the same period by 29 percent and conversion time dropped from 63 days and six visits to 31 days and three visits."