Now’s the time to build better incentive plans for next year
2011 is passing quickly. In no more than 90 days, it will be time to approve the 2012 edition of your executive and manager incentive plans. So how should you use the next three months to improve those incentive plans for the coming year? We suggest you consider the following.
First, ask your executives and managers what they like and do not like about their plans. You can gain such input in either one-on-one participant confidential chats (with a company outsider) or with a confidential 6-10 question survey (administered by a 3rd-party) providing plenty of “white space” for comments. Ask questions like these—
- Is your plan fair, why or why not?
- Does the plan drive you to do the right things? By the way, what are the right things?
- Does your plan have appropriate levels or risk and reward for the job you are doing? If not, what would you suggest is more appropriate?
- Do the best executives and managers in this company get the highest rewards and recognition? [Some would argue that executives or managers should have no idea what others make—but, they often do.]
- What drives incentive payouts in this company? Is that right or wrong?
- Do incentives and goals get in the way of you or others doing a good job? How so?
- What should the company do differently regarding incentives in the next 24 months? How will that make you and the company more successful?
Often a great way to ask such questions is by using a 7-point scale that ranges from: greatly agree (1) to greatly disagree (7). Comments should also be encouraged to allow each participant to fully state their thoughts.
Then, conduct an analysis of incentive results or payouts versus typical quantitative metrics of performance such as: growth, profitability, quality, cost savings or innovation. However, a metric we have found that often is the best measure of incentive effectiveness is qualitative. In short, take your executives and/or managers and rank them from top to bottom amongst their peers in terms of (or, using your assessment of their) effectiveness, success and contribution to the company—yes, top through bottom, without any ties.
Compare this ranking to their annual incentive earned (or to be earned). In other words, did your top-ranked executives and managers earn the most under the current plan—why or why not? We suggest that you look at this analysis over two years, if you can. This may also tell you something about the consistency of the incentive plan and its goals.
It should take you about a month to collect the information and data outlined in the above two steps.
Last, promptly convene a three-person panel comprised of a top-level executive, a vice president or mid-level executive (who does not report to the other) and a third-party outsider (say an advisor or Board Member). Titles aside, I think you can see who should on this panel.
One member should be appointed lead and another will be responsible for presenting and organizing the information for discussion—but all should have an equal vote in the outcome. The panel will consider the findings of the research conducted above—and add any additional findings or input opportunistically collected. At the conclusion of the session, 1-2 recommendations regarding the design of executive and/or manager incentive plans for the coming year should be prepared and forwarded to the CEO for review and consideration.
If the panel finds that one or two recommendations are not enough to “get it right” in 2012, we suggest that a two-year maintenance plan be proposed with actions for both 2012 and 2013. Another week or two of analysis by your CFO should test the validity and soundness of the proposed changes.
Announcement and implementation cannot be far behind.
So, what have you accomplished in 90 days?
- You have asked participants what they like or do not like about their incentive pay plan;
- You have actually tested incentive results (in payout $) versus participants ranked in order of value or importance to the organization—an exercise usually full of surprises;
- You have asked three-high level thinkers to look at the above data and suggest a few 2012 changes that make most sense for future company success; and
- You were able to implement change for 2012 well before year end, and can tell participants that their opinions were the driving force of this change.
If you plan to follow our above advice, you had better start collecting data tomorrow.