An Incentive Compensation Plan Will Jump Start Your Business
There is one absolutely sure fire way of jump starting your small or medium sized business and getting the recession behind you. Implement an Incentive Compensation pay program at your company like you have thought about for some time. Many small business owners believe that bonus compensation is something they dream of putting in place because only large successful companies can afford this perk. Every one of my clients now has some form of an incentive compensation pay package and is delighted with the results.
Small and medium size business owners continuously struggle with finding competent professionals that want to work at a small company without all the great fringe benefit packages large companies can afford. An incentive compensation program, in my opinion, is the great equalizer for small and medium companies. What motivated individual doesn't want a career where they can truly determine their annual pay? With the national unemployment rate heading past 9% over the next few months, overhaul your pay structure and not only re-energize your employees but find great talent you never dreamed available at this stage of your development.
Incentive Compensation programs are not the addition of bonuses to your current hourly and salary pay programs. A superior incentive compensation program is comprised of a "livable" base pay and a substantial bonus program earned by achieving measureable company goals. Bonus compensation should be intertwined with an employee's base pay.
There are only three things you have to do to get started - A. Include every employee in an incentive compensation program, B. Do not overcomplicate it and C. Make it fair.
Most business owners assume that incentive compensation only pertains to sales people or those employees who have direct customer contact. The next time you escort a potential customer through your business, think about how that clean restroom or the smile on your receptionist's face affected your potential customer. Every employee has a hand in customer service. Do your employees use the term "they" to describe your company or do they use the term "we?" An incentive compensation program provides an ownership experience to all employees and the term "they" will be forgotten by all employees.
It is not difficult to put together an incentive pay program covering all personnel but thought and care should go into the formulation of any pay plan because your employees are your most important asset. What are the annual and long term goals of your company? The answer to that question will give you the basis for each employee's incentive program.
The next important step is not to spend weeks or months trying to get it perfect and enlist a mathematician to work in all the details. Start it out simple and make sure it is easy for all employees to understand and calculate their own pay. I advise most small businesses to start out with just a "Net Operating Profit Bonus" plan if you have nothing at the present time. This can be paid out monthly, quarterly or even annually depending on your cash flow. The calculation is very simple and easy to understand. The bonus is simply a small percentage of your company's net (after tax) operating profit shared by all employees. Try this for a year and then start expanding the bonus program to hone in on the annual goals for your departments and divisions. You will be amazed at how many employees start turning out lights, stop wasting copy paper and think about ways to increase "their" bottom line. They now have a direct monetary impact on their own payroll and will find amazing ways to increase their bonus. Remember, if you set the bonus amount at 5% of your net operating profit, the company will retain approximately 60% of any after tax profit increase. This is a great return for any company.
Regardless of how you set up your bonus system, it must be communicated to all employees regularly to be a motivating tool. Also, if you reduce base salaries and make the incentive bonus a more material part of your overall program, I recommend paying the bonus monthly, at least for the first six months, to allow your employees to rearrange their personal financial structure. We all get accustomed to a certain weekly, bi-weekly or monthly cash flow and arrange our payments to meet our cash flow.
Most companies expand their incentive programs to encompass departmental goals and even individual goals. Providing a bonus to all parts department employees when the department has a 100% attendance rate, if attendance is your problem, or even a bonus when customer quality surveys come back with a 10% increase in satisfaction are easy yet effective methods to increase the company's bottom line. Your accounting department can easily calculate the cost/benefit relationship for the bonus.
Finally, the bonus program has to be fair for all your employee programs. This doesn't mean that it should be equal for all employees unless all your employees have the same salary. I do, however, recommend using a weighted average to divide the bonus between all employees. The weighted average I have used many times for the "Net Operating Profit Bonus" is the number of months the employee has been working this year multiplied by the employee's annual performance appraisal multiplied by the employee's annual earnings. This weighted average calculation helps to implement the fairness of a company bonus across all your employees.
The one issue that irritates me whenever it is addressed is the idea that any bonus should be capped at some arbitrary dollar amount to keep employees from earning too much money. This is absolutely the most amazing thing I have ever heard and is not only contrary to capitalism and the free enterprise system but defeats the motivation of the bonus program. Why wouldn't you want all employees to earn a 0,000 plus bonus every year?? As a business owner, your company's net worth should go up astronomically assuming the bonus program is based on solid goals and measured properly.
If you believe that no employee should ever make more money than the owner, your company will never be as successful as you want and will probably never achieve many of its goals.
An Incentive Compensation program is the hallmark of all successful small and medium businesses, is truly a win-win for both employees and the company and ensures the future success of your business. Set up properly, it should not be feared as a huge expense for your business. Change is always feared but good employees will thrive in an incentive pay program and retention issues will quickly disappear.
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