Archived Insight | February 2, 2017
For decades, many organizations dangled the prospect of generous incentive plan awards to motivate employees to deliver the results management wanted.
Although the tactic performed admirably during the last century’s long periods of sustained prosperity when incentive plans consistently paid off to a Baby Boomer workforce, this outdated “carrot” has not fared so well in recent years.
In this article, we consider the state of incentive plans today.
The extreme economic volatility of the 21st century has made it increasingly difficult for today’s workforce, which is made up primarily of Millennials and Gen Xers, to earn incentive plan payouts. Performance goals set by management frequently are unreasonable or become unachievable because of unforeseen factors beyond the control of the employee.
As a consequence, incentive plans no longer function effectively as stand-alone behavior motivators. But, that does not mean you should discount the value of your incentive plans.
As this article will demonstrate, our client engagements suggest that organizations that create and nurture organizationally unique Employment Value Exchanges and position their incentive plans appropriately within that value exchange can reap the desired outcome of employees who are engaged in and committed to the organization’s success.
We believe performance in the fast-paced, technology-driven 21st century is derived from a unique, employer-specific value exchange between the rewards employees expect from the organization and what the organization expects in return from its employees.
A balanced Employment Value Exchange creates an engaged workforce that drives performance because the employees care about the organization’s success and understand what and how they must contribute to ensure it achieves its goals. Payouts from incentive plans are just a small subset of the Employment Value Exchange.
In fact, many organizations that operate in sectors where incentive plans are uncommon (e.g., nonprofits, higher education, hospitals) have been able to achieve sustainable success without incentive plans. These organizations have created and nurture a balanced Employment Value Exchange in which compensation, while fair, is not the prominent component.
If incentive plans are no longer the main driver of organizational performance should organizations simply abandon them?
Rebooted for today’s workforce, incentive plans can be an important part of the employee compensation component of the Employment Value Exchange, as long as organizations do not expect the incentive plan to be the primary driver of performance and a substitute for fair base pay. Further, our experience suggests that dollars delivered through a rebooted incentive plan are an important investment in the organization’s top-performing talent. While the return on this investment is difficult to quantify, our client work suggests that the “return” is real and leads to improved, sustainable enterprise success and a committed, engaged workforce.
As illustrated in the two case studies that follow, a “this-is-our-organization” context pervades rebooted incentive plans that are part of a balanced Employment Value Exchange. There is a greater sense of employee engagement in and accountability for the outcomes that the organization achieves.
A high-profile hospitality/entertainment organization teetered on the edge of bankruptcy. Morale was low and bonus payouts had been non-existent since the 2008 recession.
With our help, the new CEO sought input from the organization’s employees as well as its external stakeholders to answer strategic and Employment Value Exchange-related questions such as “What do we have to do to become financially viable again?” and “How should we tie employee pay to this goal?”
From this broad-based input, the organization created and widely disseminated a three-year strategic plan that linked directly to its intended Employment Value Exchange. The critical theme that emerged was that the organization needed to restore its brand value to achieve the increase in EBITDA required for financial stability. The organization also developed value trees, which were discussed in small work groups so each employee could see how achievement of specific performance metrics within their direct line of sight ultimately would affect EBITDA.
Regular, straightforward communications were (and continue to be) important to keep the workforce focused on each member’s role in increasing EBITDA. By the end of the first year, EBITDA had improved, but not to the extent needed to pay out full awards according to the plan formula.
However, since the company considered its rebooted incentive plan as an investment in its future success, it allocated monies to recognize all employees for their contribution to the improved EBITDA and to provide an additional reward to those who made extraordinary contributions. Steady EBITDA growth improvement in subsequent years and the company’s continued investment in the incentive program have resulted in a more financially stable enterprise with an engaged employee population.
Based on broad employee input, the CEO of a $5+ billion, global financial services company had articulated eight strategic imperatives to be accomplished in the next five years. These imperatives were then expanded into 44 financial goals and milestone achievements. Deploying a second round of broad input-gathering, the CEO considered how the company’s incentive plan should support the “8/44” strategic plan. No one employee or group of employees had direct line of sight to all eight strategic imperatives and the 44 goals and milestones, yet, the harmonious, coordinated achievement of all of these goals and milestones was critical to the five-year plan.
We guided the company as it rebooted its incentive plan to engage employees in the gargantuan task posed by the eight strategic imperatives and the 44 goals and milestones. The rebooted plan allocated the incentive pool disproportionately to reward individual performance.
However, to ensure that shareholder interests were protected, a maximum incentive funding level was established as a percent of EBITDA.
While seemingly cumbersome to manage, the revised incentive plan has engaged the employees as “owners” in its success as evidenced by the company’s increasing preeminence in several complex yet lucrative new market segments.
The underlying premise traditionally attached to incentive plans is simple: The bigger the realizable pay opportunity associated with the incentive plan, the harder employees will work; and the harder employees work, the better the organization’s performance.
Our recent client work repudiates this premise. Stand-alone incentive plans no longer work. They need to be integrated into an employer-specific Employment Value Exchange that uniquely balances what employees expect from that organization and what that organization expects from its employees. It is this Employment Value Exchange (not the incentive plan) that will result in an engaged workforce that is committed to the organization’s success.
This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.
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