Incentive Compensation — Make it Work!

I’ve worked with many organizations, both as the in-house compensation expert as well as an outside consultant, and determining the economic return for incentive plans is clearly a significant effort – and there’s sometimes nothing simple about it.

Incentive plans do not work in a vacuum; even with potentially great compensation plans, outside forces can be such that the results are almost anecdotal. This doesn’t mean we shouldn’t make every effort to measure the results, but it does mean that any specific measurements will have “assumptions” built in to the equation.

Some client examples:

I implemented an extensive gainsharing plan for a $100M division of a $1B manufacturer/smelter of zinc ingot. In less than 18 months, we reduced the average production cost per pound by well over 35%, and split the dollar savings evenly with employees, some of them nearly doubling their typical hourly wage. Now, was it simply the incentive plan? Well, as part of that effort, we conducted extensive training, constant follow-up, intense metric evaluation and trending… in short, we implemented a process “around” that incentive effort.

So, did the gainsharing “cause” the improved performance?

It certainly played a significant part.

With a small, fast-growing bio-tech firm, we implemented significant incentives for management’s leadership in driving research & development and time-to-market. The incentives paid out fairly handsomely, and time-to-market for new products was reduced by almost 15% in less than 12 months.

Was that caused entirely by incentives?

Hard to say; time-to-market had become an incredible focus before implementing the incentives, and was reflected in many management efforts, hiring, etc. Clearly, the incentives played a part, but how much?

Finally, with a $120M industrial services firm, we implemented sales incentives that had the most generous “upside” in the industry. 12 months later, we realized an increase in revenue of almost 15%, with margins equal to or better than before. Yet the company still entered into Chapter 11 bankruptcy, and the strategic buyers immediately discontinued the plan, saying it was too “rich.”

Did it play a part in the company’s slide into Chapter 11, or did it stave off that bankruptcy for several more months? Again, it’s difficult to determine, given the pressures on the entire organization at the time to reduce costs, increase revenues, and bolster margins. It certainly made more in earnings than it cost in incentives, by a factor of almost 13x.

Again, these plans don’t work in a vacuum, and are usually part of an organization’s current strategic focus. As such, measuring ROI aimed squarely and solely at a particular incentive plan will always be difficult.

Can we measure the total impact of the effort, INCLUDING incentive plans? Of course, and that’s likely the most successful way to run a railroad anyway.



Kevin Berchelmann

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