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Eight rules to avoiding incentive plan pitfalls


There are a number of ways to run incentive plans for your staff. Here are eight simple rules that I have found will simplify and solidify your incentive plan process.

RULE 1: Define results before you write the plan.
It’s important to reward the results you are looking for the plan to help you to achieve.

RULE 2: Put the incentive plan in writing and sleep on it before introducing it.
If there is a loophole in your plan, employees will find it.

RULE 3: Make it clear up front that the plan will be reviewed over the first 90 days and management reserves the right to tweak the plan if it is deemed to be unfair to either the employees or the company.
Don’t allow the company to be stuck with an incentive plan that’s flawed.

RULE 4: After the plan is announced, organize a series of employee meetings to brainstorm techniques to optimize the results.
The plan should do the job it’s intended to do. If, for example, you’re setting up an incentive plan that rewards employees for improving gross margin, hold a brainstorming session to discuss specifically what employees can do to accomplish that result.

RULE 5: Pay incentive payments in a separate check.
Incentive pay is totally different from regular pay, so don’t intermingle the two in the same paycheck. Should you make the decision to discontinue the plan, you don’t want your employees (or their spouses) to perceive that was a cut in pay.

RULE 6: Periodically discontinue incentive plans even if they are performing well.
Even eating ice cream becomes old hat if you eat it long enough. To avoid allowing the incentive plan to be taken for granted, suspend it occasionally. During the suspension period, it’s a good idea to evaluate the success of the plan and implement any changes that may make the plan more effective if and when it is reinstated.

RULE 7: Be innovative.
Incentive plans don’t have to be restricted to money. Dinner for two, a luxury hotel room for the weekend with room service, Omaha Steaks, travel, premiums, etc., are also effective.

When deciding what to offer as an incentive, it’s important to make sure that the reward is commensurate with the accomplishment.

As an example, a $100 bill won’t inspire an employee who earns $50,000 a year as much as it will an employee who earns $20,000 a year. It’s important that the incentive you offer is significant enough to alter the employee’s lifestyle, even if it does so temporarily.

While your more highly compensated employees might turn up their nose at a $100 bill, a gift certificate worth $100 at a prestigious restaurant that they might not otherwise patronize could be attractive to this same group of employees. It’s not always how much you spend, but how you spend it.

And don’t discount the value of plaques or a framed letter of commendation from the president of the company. Here are some incentive plans that have worked well for others:

  • Reward an outside salesperson for bringing in a new customer who places an initial order that totals over a specified dollar amount.
  • Pay a higher rate of commission on new customers for the first 12 months they are on the books. At the end of the 12-month period, the commission reverts to the standard commission plan.
  • Pay drivers an incentive for increasing their average number of stops or deliveries or for achieving a measurable safety record.
  • Pay an incentive to loaders or order pullers for each ticket they fill.
  • Pay an incentive to buyers for increasing inventory turnover or for reducing shrinkage.
  • Pay an incentive to credit managers for reducing average collection days or for reducing bad debt expense.

RULE 8: Incentive plans are no substitute for effective management.
Managers make a huge mistake when they rely too heavily on incentive plans to do their jobs for them; managers still have to manage.