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Show employees the link between their jobs and company goals, and then reward them for helping your firm hit the mark.
How do you capture your employees’ minds and hearts so they see the link between their own job performance and the company’s financial success? Employers from Tacoma to Tallahassee want an answer to that question. Stock options have lost their shine as a credible employee reward, and the current economy forces employers to do more with fewer resources.
A growing number of companies are finding the answer in flexible incentive programs, compensation strategies that highlight the link between employees’ best work and the company’s best performance—and reward people accordingly.
“By far, over half the organizations I come into contact with are experimenting with flexible incentive programs, especially after the fall of stock options,” says Mike Maciekowich, national director of Astron Solutions, an HR consulting firm in Manhattan. “At least 80 percent of my time is now spent working on incentives.”
The process of designing and implementing an effective incentive program can involve multiple steps, each of which may require several important decisions and action items. And while each company may have unique issues to deal with, experts describe some common issues employers face when creating incentive programs.
Critical Connection: Line of Sight
When designing incentive programs, the big question facing many companies is how to get someone who’s pushing a broom to see the connection between a clean floor and company profitability. Experts say it’s all in the line of sight. That’s a term compensation professionals use to describe the relationship between job performance and broader company success.
“You have to start with information that’s meaningful to the individual,” explains Tom McCoy, managing member of T.J. McCoy & Associates LLC, a compensation consulting firm in Kansas City, Mo. “If someone is pushing a broom, the line of sight shows them how keeping the floor clean decreases accidents, which improves the bottom line.”
“The line of sight focuses employees on the outcome of the business,” adds Maciekowich. “It connects the person, the job and the corporation.”
Setting up a flexible incentive program with an effective line of sight is part science and part art, says McCoy, and the process can become so complex that many employers bring in outside consultants.
Defining Reward Metrics
Another early and important element of incentive compensation design is deciding whether the rewards should be based on company, individual or team performance.
The answer to that question “depends on the amount of interdependence and mutual accountability a job has,” says Steve Gross, who leads the U.S. Compensation and Consulting practice for Mercer HR Consulting in Philadelphia. “You have to look at how the work is organized, how much of a sense of community you want.”
Employers often start out with group incentives based on companywide performance. “Most organizations don’t know how to identify appropriate individual performance measures, so they establish companywide incentives because they’re easier,” McCoy explains. “But companywide incentives are less effective if people don’t understand how they, as individuals, affect the process. Company incentives do little to drive performance. They’re the least effective motivational tool.”
Gross agrees. “If you base an incentive plan on company performance, you get an idea of shared fate, but not individual motivation.”
By contrast, individually based incentive plans are appropriate for some jobs, but they, too, have drawbacks. “Individual incentives are good when people have different goals,” says Jane Weizmann, a practice leader for strategic rewards with Watson Wyatt Co. “For salespeople working for commissions, or people paid by piece rates, individual rewards are clearly appropriate.”
On the other hand, “individual incentives tear apart the idea of people working together,” says Maciekowich. “With many jobs, such as an assembly line, the performance comes from the group.”
“With individual plans, you get a hired gun mentality,” adds McCoy. “Your employees will be hired hands, not business partners.”
Many employers, after initially experimenting with companywide and individual incentives, come to see the value of team-based plans. “Most organizations go with team incentives because they get better results—people help each other more,” says McCoy.
Weizmann agrees. “Team incentives create better cross-functional behavior. There’s more mentoring, more cross-organizational tutoring and less internal competition.”
Some employers choose a multi-tiered plan that mixes aspects of each type of incentive—company-based, department-based, team-based and individual.
Once an employer settles on such a hybrid incentive plan, the next decision is how to weight the rewards.
“The higher the level of the job, the greater the proportion reflecting company success,” says Gross. “A CEO salary is based 100 percent on company success. For a manager, the proportion should be half company, half team, because a manager’s personal success is the success of the team. For a receptionist, the appropriate mix is 80 percent individual and 20 percent company.”
The way you should weight the rewards depends on the relative importance of individual vs. overall results, Weizmann adds. “What you measure and pay for is what you get.”
Communication Is Essential
To ensure that an incentive program works well, employers must be sure to clearly communicate the plan to employees. “Programs fail because of lack of employee understanding and lack of company ability to communicate,” says Maciekowich.
To prevent discouragement, explain to employees—and remind managers—that they are unlikely to see results overnight. “Everyone has to learn the ropes,” Maciekowich says. “You’re holding people accountable for different things now. It will take six months to a year, maybe even two to three years. Be patient.”
Case Study: Children’s Hospital Boston
Many of the issues involved in incentive compensation design and implementation are well illustrated in the efforts to improve cash flow at Children’s Hospital Boston.
The hospital’s accounts receivable (AR) department “had just replaced its billing system, and the new one was deficient,” says Susan Hancox, the hospital’s vice president of administration and human resources. “Employees were having problems with it. Morale was low.”
In fact, says Steve Nicoll, director of Patient Financial Services, it was taking the department more than 100 days to receive payment after bills were sent out.
Determined to improve cash flow by shortening the billing cycle, the hospital enlisted Maciekowich’s help to design an incentive plan that would develop a line of sight between quarterly cash flow and the number of days a bill spends in AR.
The hospital decided to go with a team-based incentive plan. Hospital executives had to determine who would be rewarded for their efforts, and on what basis, and then they had to explain the plan and the potential payouts to the affected employees.
Here’s what they decided: Team members were given three possible goals—threshold, target and optimal—expressed in terms of days an unpaid bill remained in AR. The plan clearly stated the dollar value associated with achieving each goal: a quarterly payout of $500, $1,000 or $1,500, respectively, Nicoll says. Each member of the team would receive a pro-rated portion of that payment, based on the number of scheduled hours he or she worked.
To earn the incentives, team members had to work together, bill by bill, to process the paperwork more quickly. They had to take a personal interest in moving things. The incentive payment would be added to their checks within 30 days of the close of the quarter and celebrated as a victory at the hospital, Nicoll says.
But before the hospital’s plan would work, officials had to make sure the AR employees understood what was at stake and their role in the department’s success. So Nicoll, along with the chief financial officer and the managers in the Patient Financial Services department, held two meetings with employees.
“We stated the plan, explained why we were doing it and showed how it would affect each employee,” he says. They explained the dollar value of each day a bill spends in AR and how that cash flow—or lack thereof—affects the hospital. And they explained that if the team didn’t reach its goals, the members wouldn’t receive the incentive money.
Once the AR employees understood how their work affected cash flow at the hospital—not to mention how extra efforts could increase their personal cash flow—they began working as a team and soon saw the results of their enterprise.
“Until we put in that plan, employees wouldn’t take a personal interest in getting the money in,” says Maciekowich. “Afterward, they started taking personal initiative and following up with patients, insurers or the medical records people. All of a sudden these employees became important; they became empowered. They were energized.”
And there was no grumbling, Nicoll adds. “If someone wasn’t carrying their weight, there was peer pressure that forced those not doing their jobs to pick up the pace.” The employees had internalized the goal and enforced it among themselves. Top management didn’t need to be the heavy.
“The teamwork was phenomenal,” Maciekowich says. At the end of the plan’s first fiscal year, employees reduced the average number of days a bill spent in AR from 100 to 75.8, then it decreased to the mid-60s.
“Employees get weekly progress reports so they can monitor their performance,” he says.
The AR project also netted additional benefits for the hospital.
“It really helped our recruitment and retention,” says Nicoll. “We had been losing staff to our local competitors. Now we don’t lose them any more. An HR director at a hospital just down the street told me, ‘I hire and train them, then you take them.’”
The hospital might expand the incentives program to other departments, says HR Director Gary Vassar.
All for One and One for All
The team-based plan at Children’s Hospital Boston showed employees the link between their work and company success, and, consequently, the payoff benefited both the institution and the employees. The same approach can work elsewhere.
That’s good news for employers still staggering from corporate scandals that gave stock options a black eye. Flexible incentive programs may be a viable alternative to stock options, but only if employees understand how and why the rewards are doled out.
“I think we’re entering into a new era of transparency,” says Weizmann. “Good business results need to be transparent because of greed at the highest level. We’re seeing a revitalization of incentive designs that will be apparent to everyone, that will re-engage employees in trust and communicate commitment. These are the tools that ignite results.”
Diane Cadrain is an attorney and has been covering workplace legal issues for 20 years. She is a member of the Human Resource Association of Central Connecticut.
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