Incentive pay... Are you rewarding the right behaviors?

A few years ago the bank I worked for handed me our incentive plan and asked me to find out why we paid out more than ever, but our revenue and profit did not justify that level of payout. In the review I conducted I discovered that the plan could be and was being leveraged to maximize incentive pay without actually doing much work. The reason this could happen was that the plan did not reward the right behaviors. So as you get set to pay your 2009 incentive plan, ask yourself does my plan reward the right behaviors??

The quickest way to tell if your plan is rewarding the right behaviors is to look at how much you paid out in 2008 and how much you are paying out in 2009? For most of us the incentive payout should be lower this year than last year, because well, this year was terrible for most of us. However if you did manage to have a better 2009 than 2008 here are a few more questions you should ask about your incentive plan.

1) Is your plan too simple? This question could better be phrased "Are you paying people to simply do their job?" The key to an effective incentive plan is that it should reward effort above and beyond the normal job description. If you have a sales goal, it is fine to reward an employee who meets the sales goal, but you should be rewarding the employee who exceeds their sales goal by 100%, 200%, etc. more.

2) Do all the behaviors you are trying to incentivize work together? It sounds silly, but if you are incentivizing more than just sales you should make sure that everything else you provide an incentive for works together to maximize the benefit to the organization. For example if you incentivize sales volume and sales margin, make sure the bigger incentive payout is on the sales margin. This prevents your sales team giving away the business just to make a sale. In this way the behaviors work together because making more from each sale is more important to the success of the organization than sales volume

3) Are sales and service being rewarded equally? If sales and service are equally important to your organization than you should be incentivizing both behaviors equally. All to often an organization provides incentives only for increasing sales but has a slogan or mission statement that touts excellent service. If service is your mission, it should be part of your incentive plan in some way.

4) Lastly, is your plan too complex? A successful and effective incentive plan should be easy for your employees to understand. An effective plan allows your employees to know and predict what their bonus is at any given point during the year. If a plan is too complex or too confusing for an employee they are less likely to put in an effort worth incentivizing.

As you answer these questions about your incentive plan you should get a view into where it may be improved. If you make the improvements, you may find that you get more effort from your employees and are spending less to maximize that effort. If that happens than you are rewarding the right behaviors and giving your organization a better chance for success in 2010.