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The four rules for motivating your employees with money.

We’ve debated this one forever it seems.  Should be overwhelm prospective employees with stock options and perks?  Or concentrate our available resources on just plain money as an attraction?   Well, here are rules to make money work for you in recruiting AND to better control its use after you’ve hired your candidate(s).

Some obvious qualifiers.

Salaries or hourly wages must be within reasonable limits set by the industry and matched by the competition, both regionally and for the same job classification.  But more difficult is the sticky issue of employee incentive compensation.  I’ve found that this is an area much more often the subject of a CEO phone call, a roundtable discussion, or a board compensation committee meeting.

And now we need to offer remote work as a primary non-cash incentive.  This one seems non-negotiable for many non-production-line workers and offers savings for both the company and employee if properly implemented and supervised.

But back to the money issue…

There are many studies that tell us how various industries reward employees for achievement above a base pay, or beyond expectation. And there are some industries where tools such as stock options are considered mandatory for a company to be competitive.  But how about listing the basics for designing an excellent incentive compensation program?  Here are several, gleaned from numerous companies and systems of compensation.

First, be rule specific.

[Email readers, continue here…]   A bonus or commission that is granted after the fact, without a target plan or without objectives to meet, is surely appreciated, but does not often create an incentive to exceed, only an expectation of receipt again in the next period.  When a leader and a subordinate agree upon a list of achievements in advance, then good performance can be rewarded based upon a fair assessment of accomplishments against those achievements.  And if those goals are aligned with those of the overall corporation, everyone wins, and the process can be repeated in subsequent periods.

Second, a substantial carrot, a bonus for outstanding achievement. 

A sales commission plan should reward a salesperson with a combination of salary and commission up to the expected level of performance, often called a quota.  Perhaps a part of that compensation plan should include a bonus upon achievement of quota, as a form of recognition and celebration.  Then, contrary to popular thinking, there should be an increasing reward for achievement above the expected number, beyond the list of agreed-upon incentives for non-commissioned employees.

 For a salesperson, the commission percentage should increase above quota, and a second level of bonus available at some higher point.  Sometimes, a combination of revenue, gross profit and even operating income form the basis for individual and team rewards.

Next, some form of rewards should be designed to be immediate.

Rewarding a February achievement in December disconnects the reward from the event, reducing the effect of the reward itself.  If we believe that money does motivate, then we should reward positive behavior immediately to reinforce that behavior.

Protection against gaming the system.

Finally, and perhaps most difficult to design, there must be protection against workarounds or from employees gaming the system.  Reward only gross revenues, and salespeople will push the limit of profitability with discounts, impacting the corporation but not to the same extent, their commissions. A good example is the real estate agent, paid as a percentage of the sale, not upon the sale’s relationship to the asking price.  Sometimes, agents push their clients to accept low offers to assure a quick closing of a deal, since their participation percentage is only slightly affected by a price cut to close the deal quickly.

More examples of gaming the system.

There are more insidious ways to game a compensation system.   Wall Street brokers helped to create the financial crisis by following a bonus system driven by quantity, not quality of trades.  Salespeople paid entirely upon closing a deal will care less about the subsequent completion of a complex, time-consuming transaction.  Support people paid based upon the number of tickets closed will rush to close tickets at the expense of quality service.   There must be thousands of such examples where poorly designed systems allow employees to achieve personal goals that are at odds with the best interest of the corporation or its customers.

Remember the four compensation rules.

So, use these four items as a checklist as you create compensation plans for various levels and types of employees.  Rule specific; substantial upside bonus; immediate rewards; protection against working around the system.

  • If you’re interested in these issues, look up work by Jeffery Pfeffer at Stanford.

    While Dave calls it gaming the system, one of the problems with strong incentives is that you often get what the incentive asks for. So, if the incentive is for sales, you get sales which may not align with the most profitable sales. Wells Fargo had strong incentives to open accounts and got accounts open, etc. This is why incentives work better in sales (where you can better measure what you care about) and less well in other areas.

    If you can’t fully measure the important parts of the job, strong incentives can pressure employees to over emphasize the measured parts of the job.

  • Arthur Lipper

    Both employers and employees should be comfortable with the belief that competitors would pay a higher salary than was currently being paid by the employer. The reason for remaining a productive member of the team must be more than the monthly pay check.

    The employer must structure the job function of the employee to be one of mutually recognized importance, but not one of dependence, if possible. Those few n positions of dependence should be seen as partners, not employees. Of course, all of those working in a company should be thought of, in the aggregate, as partners.

    The difference is that those with an interest in increasing the profits of a business must have a greater understanding of the relationship of wages to profits, whereas the focus of salaried only workers must focus on their role in creating customer satisfacction.

    In many cases, it would be constructive, were it possible, to fairly assign revenue generation percentages to departments and even job functions. The greater the employee and employer recognize the importance of the employe to the business of the company, the better understood can be the fairness of employee benefits.

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