HR Consulting

Employee Incentives

One of the most efficient ways to achieve this is to introduce an incentive that would motivate them by the prospect of a reward if they and the business perform well.

An employee incentive plan aims at increasing employee productivity and therefore profits for the company (financial objective), or aims at giving back to them (a well being, non-financial objective such as job satisfaction), or both.

As the business owner, or as a Company Director, you will have to consider several parameters and take decisions:

• Which employees should benefit from this incentive plan?
A minimum should be the key employees to the business, the ones whose departure would have a negative impact. The alternative would be everyone in the company.

• Which criteria to elect?
There are hundred of criteria you can choose from and they don’t need to be the same for everyone. Ideally, they are relevant to the employee (meaning the employee’s actions have an impact on the chosen criteria).

• How to measure the performance?
The incentive plan will be more powerful if the criteria can be easily measured as it will be perceived as fair by the employees. If the performance cannot be measured, the plan will be perceived as a lottery and it will lose effectiveness.

• What time factor should be used for the calculations?
The time factor depends on the criteria. Yearly is easier, but it tends to put pressure on the last few months of the year. A quarterly or monthly calculation would remind the employees that profit is not something that happens at year end: It is built every day!

• Which rewards to grant?
You can decide yourself what the reward(s) should be or you could talk to your employees to understand what their priorities are. I would recommend the second one: If you know what your employees are after, the incentive becomes really strong.

• How to deliver the rewards?
The plan can make provisions every month/quarter and pay out only 50% (as an example) of the amount due: The 50% balance is kept until the end of the year and the accounts are finalised.

To optimise the team building effect and the sense of ownership amongst the employees, the following is usually recommended:

• The owner needs to keep his/her expenditures of a personal nature at the Budgeted level, or exclude the extra expenses from the calculation (Equivalent to dropping them below the profit line).

• The plan should be updated each year (Objectives, levels of achievements).

• It is more efficient to allocate an individual percentage of the profits to each selected individual (1% for instance), rather than a pool of 10% (for instance) divided amongst the beneficiaries.

The business owner needs to be aware of some risks if the employee incentive plan is not properly designed or properly implemented:

• The financial accounts of the business need to be accurate, or there could be discussions and disagreements;

• The employees need to understand that in some periods, the company can make a loss;

• A course of action needs to be decided in the event the last period has a massive loss, which wipes out part or all profits of the previous periods. One way to avoid this problem is by including a restriction clause stating that the plan is suspended if the profits of the financial year do not reach a certain $ level. This is very important to protect the business and its owner.

Good luck to you and your business venture!