Incentives

"Show me the incentives and I will show you the outcome." - Charlie Munger

A strong incentive program can often be the difference between a good business and a truly great business. The best companies throughout history have taken different routes to industry domination, but it isn't a coincidence that many of the best developed an internal culture of ownership through employee incentives that linked individual performance with the organization's.

This week, we wanted to share our thoughts around building incentive programs into your organization. Incentive programs done right often boost employee motivation, morale, and performance. But when they are designed haphazardly, watch out! Incentives are like guns: aim them in the right direction and make sure they don't misfire, backfire, or cause friendly fire!

When building your employee incentive program, here are a few thoughts to consider:

1. Clearly state your goal for the program.

It sounds silly, but if you don't have clarity around your goal, your program could take you anywhere but where you want to go. Is it better employee engagement? Higher productivity? Higher quality service? More positive reviews? Employee retention? Whatever the ultimate goal for a particular bonus or reward program, ensure that it aligns with the reward structure and the overall goals of the organization.

2. Explore all options when building out your incentive program.

Will your program be one time and discretionary in nature (annual bonuses) or ongoing (performance bonuses, sales commissions, etc.) or a combination? Will there be both monetary and non-monetary rewards involved? It's best practice to explore a combination of all of the above, but not all employees will be interested in the options on the table. Solicit feedback when building out your incentive options so that they don't fall flat with employees. Pick the incentives that are most attractive to your employees, are fair for all parties involved, and align with corporate goals.

3. Keep things simple.

When building out your incentive program, the simpler it is to understand, the easier employees will grasp the program and buy into it. In general, the simpler the program, the better. But bear in mind, there are often drawbacks to over-simplified arbitrary incentive systems - either they are not robust and can't adapt to changing business conditions, or they encourage gaming the system. For example in booming economic times, arbitrary incentives may be so easy to achieve, the extra incentive to continue to outperform diminishes. Similarly, in lean economic times, a badly designed incentive program could become so far out of reach that employees become disheartened or worse - they encourage unethical behavior for the sake of maintaining performance at all costs.

Take more time than necessary up front when formulating the program's performance hurdles because once you offer incentives to your team, employees don't like to see the goal posts constantly changing. Here are a few questions to consider when building your program:

- How easy or difficult are the hurdles to attain?
- Are there clear metrics on which to judge employees to prevent disagreements?
- How much control over metrics do employees have?
- Are the incentives robust in different economic climates?
- Are they flexible or arbitrary in nature?
- Have you protected the right to revisit the program as business conditions require?

4. Commit to incentives based on resources available.

Build a budget around what types of rewards your business can afford. Incentive programs aren't a zero sum game and the best ones create more business over the long-run. But often, there are upfront investments required when building in new commissions, discretionary bonuses, and employee perks.

5. Determine what cadence for rewards and bonuses makes the most sense.

When considering what incentives to offer to employees, it is important to keep in mind as the operator how much time you are able and willing to dedicate to tracking and administering bonus and incentive programs. Weekly bonuses are great for keeping incentives top of mind for employees, but come with a real drawback - the time invested in tracking each employee's performance. Annual bonuses are much easier to manage, but have two clear drawbacks: a growing sense of entitlement each year they are given and the lack of constant feedback for employee's performance. Different industries have different standards - e.g. blue collar trades sometimes award weekly or monthly bonuses as well as project-based bonuses where as bonuses in white collar professions tend to be awarded on a quarterly or annual basis.

6. Adapt as needed.

The goal of an incentive program is to roll it out without needing to retract or change it constantly. Constant changes create more employee frustration than motivation and are best avoided. But, all incentive programs must be refreshed, simplified, or flat out overhauled at times due to changing market conditions, a failure to bring about desired results, or unforeseen second-order effects. Make sure you retain your right as the owner to do so if conditions require it.

In summary, incentives drive human behavior, and behavior drives outcomes. We hope these thoughts will help you think more critically when implementing incentive programs in your organization.

We would love to hear from you: what incentives have worked best in your business and why?

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