Employee Incentive Plans: Make Them Worthwhile

By | April 18, 2005

A few years back, while leading a seminar, we asked the audience to see if anyone had an employee incentive plan. One person raised his hand and proudly said: “I do. If they work hard they get to keep their jobs, that’s their incentive.” Although this was said with a bit of humor, behind the comment is a basic truth. Employees are hired and expected to perform at least “average.” So why motivate them at all?

Unfortunately, it is not that easy. Most people need and want some external motivation. Humans have ups and downs, times when they focus and times when they lose focus. The role of a good manager is to guide employees to work on what is most important in the most efficient manner. Providing employees incentives is one tool that management can use.

In our experience, it seems that about a third to half of agencies have some sort of employee incentive plan. Unfortunately, most of these plans are ineffective and a waste of money. The plans rarely reap their intended results.

Incentive plans fail when the structure is targeted too broadly and not focused on individual people or teams. The typical profit sharing plan where it is “one for all and all for one” does not motivate anyone. This type of profit sharing becomes an entitlement. Also, the productive employees will resent that the poor performers. Employees need to have a clear understanding of the linkage between their effort and their incentive compensation. A well-designed employee incentive compensation plan will make each department or individual focus on things they can control. The best plans encourage the behaviors that create successful results.

The starting point
The first step in designing an employee incentive plan is to understand what the ideal end results for the business are. For example, the agency might want to lower client attrition, increase sales and increase productivity. The critical steps for each of these goals need to be mapped out. If the agency wants to increase productivity, then streamlining workflow, training and better communication between the service staff and sales staff might be some of the critical steps.

Management then needs to review what the employees need to do more of, less of, or what needs to be totally changed. For example, the service staff might be double entering data because of antiquated procedures. Or perhaps CSRs are not delegating follow up calls for claims to CSR assistants.

The next step is to assess the behaviors, tasks and decision-making actions that the employees can control and that management wants to encourage or discourage. Management can check whether CSRs are still double entering data, reviewing renewals in a timely fashion, or delegating follow-up calls to assistants. A plan can blend the behavior with an appropriate reward.

A well-rounded plan
The typical employee incentive plan should include a three-tier approach of immediate recognition for a job well done, short-term rewards for performance over a month or quarter, and long-term rewards for being a loyal employee over the years. Layering incentives is a good way to reach employees from different perspectives. Those who like immediate satisfaction will get it and those that look long-term will be satisfied as well.

The following are some key fundamentals in any successful incentive plan.

Keep it simple and special (KISS). Good plans are easy to implement and to follow. The employees need to know what they can do to earn an incentive and what exactly that incentive will be. If the plan involves tracking a lot of detailed performance indicators it will waste management’s time and confuse the employees. Look to big picture performance results: Did sales go up or down? Is client retention staying high? Is productivity increasing or decreasing?

Reward only for surpassing business goals.Incentive plans should kick in only after average performance is exceeded. This means that management needs to have clear goals and expectations. Employees need to have a clear understanding of what is expected for average performance and what actions they can take to help the company exceed the basic business goals and thus earn an incentive.

A target goal might be to increase productivity by 10 percent within the year. The CSRs then need to understand that they will need to handle 10 percent or more commissions by the end of the year in order to earn an incentive. If the service staff does not increase productivity, then there is no reward.

Reward great individual effort. Catch employees doing something right and make sure everyone in the office sees that management recognizes it. If a CSR did a great job handling a difficult account then shower him or her with immediate praise, recognition and a reward. There does not need to be any analytical performance tracking for this incentive plan. This way the staff will know that management appreciates the extra effort they put in. This is one aspect of the first layer of employees’ incentives.

Encourage team results. For service staff and administrative employees there needs to be a fair amount of teamwork. In an effective plan, performance results are also tracked and rewarded based on unit or department results. Tracking individual performance can be difficult, so this is a good compromise between rewarding great individual effort and excellent overall agency wide results (such as total growth in sales).

Noticeable rewards. A good rule of thumb is that the total value of incentive rewards that an employee can earn should be around 8 percent to 12 percent of his or her base compensation. Anything under 8 percent will not be appreciated. This does not mean that the employee must earn incentives of 8 percent or more, but that they can earn up to that amount.

Be creative. Today’s employees look beyond money for other rewards. They are looking for challenges, recognition and empowerment. Non-cash recognition awards are a very effective way to reinforce the agency’s values. For example, employees who provide outstanding customer service receive special awards. One way is for employees to be nominated as the top performer of the month or quarter. Management needs to think about the types of awards that make sense for employees. (see Employee Awards chart.)

Long-term incentives. A good plan will allow employees to earn incentives monthly or quarterly. A great plan will add in a long-term reward system as the third layer of incentives. Think of long-term incentives as golden handcuffs. Employees who build up nice war chests will think twice before leaving for a small salary bump if they have to forfeit incentive gains.

Probably the easiest plan would be a non-qualified deferred compensation plan based on profit sharing. Each year the employee will earn a certain amount of compensation based on agency profitability. This can be set-aside in a separate account for tracking purposes. The payment is deferred until a few years down the road or the retirement of the employee.

A more exotic approach is the use of phantom stock and stock appreciation rights. Again, the employee cannot access this deferred compensation for several years or until retirement. In some cases it might make sense to actually provide great long-term and key employees with actual stock equity in the firm.

Keep in mind that human nature is such that the long-term rewards are often forgotten or discounted by employees, unless regular reminders are presented to them. Also, this type of approach usually does not directly link individual effort to rewards, but for the purpose of golden handcuffs, that is usually okay.

A final thought
Employee incentive programs are a very powerful concept when employees can understand and see the connection between their performance and their rewards.

A great plan can help transform an agency from an average performer– where people come to work to just do their job and get paid –into one where excellence and outstanding results are the goals.

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Insurance Journal West April 18, 2005
April 18, 2005
Insurance Journal West Magazine