Incentives do help!
By Roger La Salle
The ideal purpose of incentive schemes is to allow staff to share in the success of the business with greater success translating to greater bonus payments. The same should apply with the quest for innovation, perhaps more so than most other business activities, because it is well understood that companies that don’t innovate, don’t survive.
1. Traditional incentive schemes
Traditionally incentive schemes, usually referred to as bonus schemes fall well short of the mark. These reward people for years of service with perhaps 1% pay bonus awarded for each year of service. The aim of this is to encourage good people to stay with the business.
There are a number of problems with such schemes that render them somewhat obsoletes including:
· It also encourages poor performing staff to stay
· It does not reward endeavour, just longevity
· It must be paid even in times of bad business outcomes
· Staff expect it as a part of their salary and thus is it not treated as a bonus so it does not work to “incentivize”
2. KPI’s based incentives
Incentive schemes are ways to reward people who meet certain agreed KPIs. Such schemes are very common but less than ideal for a number of reasons including:
· Meaningful KPI’s are hard to set for certain job functions
· Clever operators can manipulate KPI outcomes to achieve KPI rewards
· They do not align all key positions as one key position may be motivated to achieve a good KPI by working to erode another department managers KPI. There are numerous examples where this is done
· Such a scheme seldom trickles down to the bottom rung of workers.
3. Performance against forecast EBIT
This approach seems to be the most equitable and easy to implement method and has been seen to work well in major organizations. With this method every member of the organisation benefits. Indeed, why should just top management and senior staff alone be incentivized? Success in business should be a team effort with team rewards.
With this approach a target EBIT is set for the forthcoming year. Staff do not necessarily need to know the quantum or forecast actual dollar EBIT figure, perhaps instead just a mark on a barometer graph updated monthly to show progress.
If the target EBIT is met then all staff receive a bonus payment related to their seniority or rank in the business.
For example a senior or “C” level executive may receive a 25% salary bonus for meeting EBIT targets, the next level down, perhaps 10%, the next lower level 5%, down to the bottom level of perhaps 3%.
In this way all staff are engaged with the business and are incentivized to work towards ever better EBIT outcomes.
The percentage payments as bonuses can also be linearly linked to the business performance against that target EBIT. For example if the EBIT actually achieved is double the EBIT target then bonuses are accordingly doubled.
Such a scheme is easy to implement as well as incentivizing and rewarding everybody.
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Roger La Salle, trains people in innovation, marketing and the new emerging art of Opportunity Capture. “Matrix Thinking”™ is now used in organizations in more than 29 countries. He is sought after as a speaker on Innovation, Opportunity and Business Development, is the author of four books, and a Director and former CEO of the Innovation Centre of Victoria (INNOVIC) as well as a number of companies, both in Australia and overseas. A serial inventor, Roger is also responsible for a number of successful technology start-ups and in 2004 was a regular panelist on the ABC New Inventors TV program. In 2005 he was appointed to the “Chair of Innovation” at “The Queens University” in Belfast.