Article 5.1

WHY ARE A MAJORITY OF INCENTIVE PLANS FAILING

Many managers are currently exploring or introducing new incentive plans in hopes of sparking new initiatives from the troops and retaining best employees. The success rate for all incentive plans has been, unfortunately, deteriorating since at least the 1981-82 recession. Two surveys in particular have spoken to me:

1. A massive survey by the Public Affairs Foundation in 1983 questioned thousands of employees across many industries, job-types, and company sizes; some conclusions were that:

a. 15% saw significant connection between what they were paid and what their performance was

b. 12% saw some to little connection

    1. But 73% saw no connection between pay and performance

2. A 1990 survey by Hewitt Associates of Lincolnshire, IL. concluded that 59% of CEOs of small businesses are not satisfied with their outside sales-compensation plans for two main reasons:

a. The plans failed to motivate their staffs to make the extra effort

b. They were overpaying poor performers.

SOME INTERPRETATIVE THOUGHTS

Some firms undoubtedly have made incentive plans work, but the plan is the tip of the iceberg. If others in search of a quick fix imitate the tip without the rest of the iceberg, then the plan will fail. Incentives are no substitute for poor management, unfocused strategy, and other prerequisites.

Paying for individual performance is getting more difficult for a number of reasons:

    1. The piece-rate thinking born in an era of mass-production, standard products and services doesn't work today. The customer is so spoiled that they expect perfect quality goods and services in variety and instantly. Piece-rate plans are not friendly with trying to achieve quality, variety, and unusual customer requests.
    2. The growing dependence on information technology has made the integrated team performance more vital; individual initiative is still important to, but not sufficient for, a customer's loyalty.
    3. Many firms are trending toward sole-supplier deals, in which they are marrying a vendor firm's total capability and often guaranteed quality, not a key individual's performance.

Since 1982 at least, the economy has not been kind to incentive plans. From 1946 to 1974 the US economy tripled while the standard work week shrunk by 20%. On average most firms had record results every year which paid out on incentives. We credited the results to our hard work and not to economic accidents of history; we worked less and made more- now it is the reverse. From 1975-81, inflation airbrushed financial results, and people were paid bonuses that were often just cost-of-living-adjustments in disguise.

Also since 1982, competition and the rate of unforeseen change have caused both financial and incentive-plan results to often go haywire. Perhaps some incentive plans might average a fair payout over a 5 to 10 year period, but- how many employees have such a time- horizon, and won't most companies change strategies in the meantime? These turbulent times have unmasked mediocre performers who use to grow with the economy and get paid bonuses accordingly.

For outside sales plans in particular, most firms have outgrown their original simple commission plans. When a firm starts up and has few established products and customers, penetrating accounts and mastering new products is the only game to play. Within mature businesses, though, it is easier to maintain existing business. If one is paid the same for both maintenance and new growth, new growth work is avoided. Try instead to: pay 3 to 4 times more for new growth results than maintenance; hire 10 to 20 percent of the salesforce who are geared and steered to new growth results; and keep stripping away mature accounts from mature salespeople where activity is eroding- don't tolerate harvesting.

Regardless of the reasons, if 73% of employees covered by incentives see no pay/performance connection, what must they think of the program and its designers. If unforeseen external events wipeout bonuses, what does this do for the morale of those "promised a bonus"? Could we be demotivating more people than we are motivating with quick fix incentives?

INCENTIVE PLAN PREREQUISITES

If we see an incentive as the match to light the fire, then we must first build the near perfect fire to light; otherwise, the match or its effect will quickly go out. Below is my model for the "seven-steps of profit power" which puts incentives sequentially last.

THE SEVEN STEPS OF PROFIT POWER

To explain this model, first appreciate that good financial results are symptoms of strong underlying causes. If a firm manages by the numbers today, a firm is harvested quickly. Good numbers start with good management (#1) Out of their minds comes a focused, articulated strategy (#2) that will allow the firm to achieve sustainable competitive and profitable advantages over competition. From strategy all systems (#3) must be continuously developed and refined. Systems coordinate, organize, discipline, and inform employees-plus more; they are the key to distinctive, consistent service. Great people (#4) can not be attracted to and kept by a firm with poor management, unfocused strategy or poor systems. Given ingredients 1-4, education (#5) will result in skill improvement. Only skilled talent can appreciate good assets/tools (#6); world-class tools don't do much for monkeys. Then incentives (#7) may work if employees are already receiving 110-115% of the going wage for their job in a given labor market. To attract and keep achievers who will respond to education you must pay good wages upfront, because it is a seller's market for them. Only marginal, desperate, and opportunistic people must work for below average wages plus at-risk incentive pay.

If a firm has the first six steps, then employees will already be showing can-do-better initiative. After all great coaches, teachers, and leaders confront followers with high expectations, measurable discipline and the intrinsic joy of a job well done. The rest try to use playing time, grades, and incentives to avoid having to be positively and creatively confrontational and truly competent. With the first six steps, in place, incentives can reinforce the existing initiative and share fairly a piece of the premium profitability that will result.

CONCLUSIONS

Incentives have their place once all prerequisites are in place, but too often these simple, powerful tools are misconceived and misapplied. We need to give more thought to: building a better bonfire: designing better incentive plans; and implementing these plans more carefully. The growth and inflation of the past won't make plans look better than they are, and future turbulence will test plans severely. We must look before we leap at imitating someone else's supposedly successful plan; the statistics demand caution.

Merrifield Consulting Group, Inc., Article 5.1