When it comes to establishing an incentive compensation plan, most business owners we’ve talked to simply want a way to maximize productivity from their employees and create greater efficiency. They believe that if they can get their business to perform more efficiently and effectively, they essentially can pass along a percentage of those profits to their employees.
One major misconception and struggle we hear from owners is how to define the standards by which to incentivize their employees. Most feel that employees should be incentivized based on what is generally considered the status quo today – employees simply doing their jobs. However, in order for an incentive compensation plan to really be impactful on a company’s bottom line, plans should be based on an employee’s performance above and beyond what they were hired to accomplish in the first place.
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The Pros and Cons
Before you commit to moving forward with an incentive compensation plan, consider the advantages and disadvantages. While it may work for you, it could also backfire. Here’s a short list of advantages as to why incentivizing your employees could work for your business:
- An incentive compensation plan based on an employee’s performance (going above and beyond what is minimally expected) could keep your employees motivated to work and maximize productivity.
- As a result of maximizing productivity, an incentive compensation plan could help your business increase profits and enable you to put a portion of those profits back in your employees’ pockets.
- An incentive compensation plan could improve employee morale and teamwork if you find that is an issue for your business.
Now consider some of the disadvantages to incentive compensation plans:
- If employees have certain time-bound goals that are tied to an incentive compensation plan, this could hinder the quality of work produced. Some may rush through their tasks and essentially produce or deliver a lower-quality product or service. It’s important that if you choose to implement an incentive compensation plan, you clearly layout employee goals that align with the business goals. The goals need to be SMART goals (Specific, Measurable, Attainable, Realistic and Timely).
- An incentive compensation plan can be flat-out dangerous. Depending on the type of industry you’re in, if employees are rushing around to complete their tasks, accidents could happen. Accidents will not only hurt your employees, they could hinder your business’s overall productivity and negatively impact your bottom line.
- Despite whether you think an incentive compensation plan will motivate your workforce, it may actually be demotivating for some employees. For example, what if an employee is working as hard as they can, yet are still falling short of meeting the requirements to benefit from the incentive? They could become disengaged and, as a result, stop trying their best. Again, this could negatively impact your business’s productivity and bottom line.
So, What’s The Solution?
There’s no one clear-cut solution for all businesses on this topic. Some businesses may greatly benefit from establishing and implementing an incentive compensation plan. Others may be unknowingly or unintentionally setting themselves up for hard times ahead. It all comes down to thoroughly evaluating your strategy and SMART goals for creating such a plan.
By Dustin Raber, CPA, CMP (Millersburg office)
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