When companies are looking for ways to curb spending, it’s hard to justify an overreaching employee bonus program. But cutting out bonuses altogether can impact morale, employee motivation and retention. Instead, what most incentive programs need is a hard look and a more structured framework.
“Sometimes, it’s hard for business owners to sit down and go through the budget process, but it can be very simple,” says Bob Holden, senior vice president of the Employco Group. “The trick is to set individual goals that are directly related to the overall company goals.
Smart Business learned more from Holden on how to build a more appropriate and effective employee incentive program.
How should businesses approach employee incentives?
There are different kinds of incentive programs. There are merit-based performance programs where employees are given an increase based on their individual work performance. Typically, it’s a percentage of their base and revolves around the performance appraisal itself. There are dollar bonus programs based again upon individual performance, also tied into corporate performance, which you can measure a couple of ways — by actual profit dollars, by revenue growth or by different goals that have been set for an individual, i.e. client retention or entry into new markets.
The management team and/or owners must put together the annual budget, typically during the quarter before the firm’s fiscal year. One of the components of the budget is the salaries and the associated benefits, so when companies budget that out they know what they’re going to spend. This should be based on the performance of the organization. A good organization will pay out bonuses when the company itself does well. It may not make sense to pay out bonuses if you’re losing money because you’re rewarding poor individual and/or company performance.
During the budget process, management is forecasting what it believes profits will be — either the return on investment, return on equity or client rentention. Once they’ve established what the forecast is, that represents a pot of money to use when devising a goal-setting process for individuals and/or departments.
How should incentive programs be structured?
Businesses should develop a performance appraisal process that has a goal-setting piece to it. Set up a weighted matrix where you can say: If your client retention is 100 percent, that’s worth a rating of an A; if you’re at 75 percent, it’s a rating of a B; if it’s 50 percent, it’s a rating of a C. You take those weights and then figure out how they factor into not only the total pot but how do you transfer that down from a department to an individual.
Each department in a company affects the ROI of the businesses. How do department goals tie into the success of the overall company goals? How does the individual affect both the department goals and the company goals? And you set up a matrix based on that: The company has to do X. If the company does X, you take the next step. Then you decide based on the matrix and the importance of each department what pot of money should be worth going to each department and the individual.
What if individuals or departments meet goals but the company does not?
If everyone is meeting goals and you set the goals properly, the company should be at an A level, unless it’s beyond individuals’ control, which can happen in a tough economy.
Management should communicate to employees that when the ROI of the company is 100 percent, the pot may be X. It will be a different amount if the ROI is 70 percent or 50 percent. If there is no ROI, then based on what the goals of the individuals in the department are, you can give a small bonus if fiscally possible, because you don’t want to penalize the A performers. But you have to build that into your budget process prior to that situation revealing itself. In this economy, many businesses do not have that luxury. You can have two pots: one for a merit increase when somebody gets their performance appraisal, and a cash dollar bonus incentive, which can be given monthly, quarterly or yearly based on the company, department and individual performance.
How should CEOs set goals and communicate financial information to employees?
As far as the ROI and revenue goes, you certainly should have a quarterly meeting describing revenue goals for each quarter. This way everybody knows from a corporate perspective where the company is and what that means to their overall goal effort.
You can do a goal-setting process that sets, for example, three goals for the year. If, for example, in a firm that processes payroll as on outsourced service, a payroll person is working hard on quality; that means customers aren’t complaining and are less likely to leave. Client services, for example, should make multiple visits per year per client to review a certain array of various topics that are of concern to their client base. There should be a measurement system in place so you actually know when a complaint comes in. So those are the kinds of goals that you can set that help with client retention and tie into overall performance, even when they’re not money or commission driven.