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Going Above and Beyond: Compensation Incentive Plan Disasters


Posted by Newbanks Letke, SPHR, GPHR, Amy at Thursday, 05/24/2012 4:37 pm
 
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Going Above and Beyond: Compensation Incentive Plan Disasters

Our friends and family love to share their HR horror stories with us. And we love to hear them! The other day we heard a particularly troubling story and we just had to share the shocking details.

This friend was working for a local gym as the director of the personal training department. He was compensated depending on how many clients he recruited for their personal training services and he went above and beyond what was asked for him. Each month, he beat his goals and he received the appropriate bonuses. The company continued to raise his monthly goals and he continued to beat them.

Soon enough this gym, which was not located in a particularly prime location in Louisville, was starting to turn around. So what happened? Right before he was about to reach his next goal and receive a rather large bonus, he was fired. The company didn’t stop there. They also fired the director of the membership department who was surpassing his goals as well as managers at other locations who were doing the same—a total of nine over-achieving employees were let go.

From an outside HR perspective, it seems like the company could no longer keep up with the compensation incentive plan they created! Not good. They set the bar and rewards high, but didn’t take into consideration what would happen if employees actually met their outrageous goals.

Now, this is a pretty extreme example of a compensation incentive plan going wrong, but then again, it did happen right here in our city.

This isn’t the only compensation incentive plan disaster story we’ve heard. We’ve collected quite a pile over the years and today we’re sharing them to help you understand what you need to think about when it comes to designing your compensation incentive plan.

Here are the top four questions you need to consider
when designing your compensation incentive plan

What is the right amount for your compensation incentive plan?

Our first story is the perfect example of having an overzealous compensation incentive plan. You have to ask yourself: If your employees meet your goals, could you afford to pay the incentive?

You could also have an underrated rewards system that does little to actually motivate your employees. Let’s say your compensation incentive plan states you’ll reward an extra $20 for meeting stretch gials. Wow $20. That’s like dangling a piece of string in front of a dog. They don’t care. What you need is a tennis ball and you need to throw that tennis ball pretty far. But how far? To the meadow of happy mediums. The perfect compensation incentive plan is high enough so your employees have to reach for it, but low enough that you can afford it without going bankrupt (or having to fire the over-achieving employees).

What is your compensation incentive plan tied to?

One of our consultants used to work for a manufacturing company whose compensation incentive plan was tied to the number of widgets each worker created. Of course, every worker stepped up their game and produced as many widgets as they could. What happened? The reject numbers went through the roof! The company had a remarkable number of widgets, but the quality suffered.

As a business owner, you have to decide what you want to tie your rewards to. Do you want to focus on the quality or quantity? Is it how many projects the employee can complete or is based on the satisfaction of the customer when the project is completed? The last thing you want is for your quality and customer satisfaction to suffer as a result of your employees feeling the pressure to reach a certain number.

What is your compensation incentive plan encouraging?

A woman we know works for a company that sells windows and her company encourages friendly competition among their sales staff and the managers often turn their heads when the competition gets a little fierce. For example, the woman printed off her list of prospects that she was going to call that day, but by the time she got to the printer the list was gone! One of her co-workers smugly admitted that she had taken the list and there was nothing the employee could do about it.

Is that the kind of atmosphere you want in your business? When you are creating your compensation incentive plan you have to put thought into what you are incenting. Are you encouraging competitiveness among your staff that could possible lead to animosity and an unhealthy working environment? Are you promoting unethical behavior when it comes to how employees approach prospects? Whatever your compensation incentive plan encourages, you have to make sure it can’t be detrimental to others.

You have to consider whether you want to focus on the success of the individual or the company. When you focus on the success of the individual it may end up like the windows story, and when you focus solely on the success of the company it may produce apathy. Find the middle ground that promotes team work as well as a healthy and productive work environment and your business will be running smoothly in no time.

Lastly, you should align your compensation incentive plan with the values of your organization. If what you are asking your employees to do to get incentives directly contradicts your mission statement, then you have a problem.

What is the language in your compensation incentive plan?

A successful compensation incentive plan all comes down to communication. Is it easy for your employees to understand? It is clear on what they can and cannot do to achieve their goals? Is there a limit to how far they can go? As the business owner, you need to communicate the compensation incentive plan to your employees. You need to make it clear exactly what behavior you are rewarding and how much your incentive will be.

Feel free to comment below with your compensation incentive plan disaster stories. We’d love to hear them!



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