It may be a while before we face the holiday season again, but since sooner is always better than later, now is the time to address what has come to be known as “the Christmas bonus.” Every year someone calls me the Grinch because I’m the guy who points out the ineffectiveness of the holiday bonus. Employee benefit advisers, brokers and consultants need to recognize there exists more creative vehicles that can serve as incentive programs to drive and maintain growth as well as recruit and retain key talent.
Let’s face it, if you’re looking for incentive programs with long-term effect, think again about handing out bonus checks near the end of December. In fact, many studies indicate that the impact of a holiday bonus on employee focus is typically two weeks prior to and one week after receipt. Further statistics point to the increase in resignations shortly after the bonus check is cashed. What’s wrong with this picture? Here’s the truth: You should be aiming for a rewards strategy that stimulates employee focus 52 weeks of the year, not a measly three. Also, a properly designed rewards program will attract and retain talent, significantly reducing the loss of employees who are critical to the success of the company.
Fundamental to any growth strategy are three factors: fulfilling the original business plan (mission, values and company vision); the emergence of sustainable growth patterns (revenue development); and a suitable return in capital for company shareholders.
In order to best achieve those elements for growth, key employees must be on board — and the most direct line to meet that goal is by fostering a culture of employee ownership. In other words, employees have to draw the same conclusions as you about what’s important. But for that to occur, ownership mentality must be personalized.
Most employees recognize the bottom line to a company’s success is, well, the bottom line. But it’s also vital that they understand how their specific contribution makes that happen. Without this critical engagement on the part of employees, their focus will be off center; therefore, compensation should be tied to results that are quantifiable and measurable.
Here’s the big question: What are your clients getting right now in return for what they are paying out? I’ll answer that for you. They’re getting the current result, whatever that may be. But if the results you wish to help them achieve this year are not measurably different than what they had last year, what are you going recommend for next year to drive a different performance level? And how will compensation differ in regards to those changes?
Growth implies different results, and by extension the strategies you’ve employed to achieve current results can’t be the same in the future should a different result be desired or expected. Since compensation is one of the strategic tools in a business’ arsenal to affect change, benefits advisers, brokers and consultants looking to develop different performance results can’t expect to achieve forward motion if the growth rewards programs don’t match up to their goals.
Let’s break it down a little. If a firm sets its target on growing net income 20% per year over the next three years, you need to ask yourself a few important questions. What part of the compensation and rewards plan communicates that goal to employees? If the company achieves — or better yet — exceeds that number, how much is the company willing to share? Who will get their fair share and then some if these critical financial targets are met? To what extent will key employees’ participation fuel this desired growth? In other words, what comes first: growth or employees that are truly motivated by incentives to create that growth?
For growth to occur sustained performance must be achieved, and since these results are largely a function of your key employees, compensation becomes a focus. A business needs to determine the right mix of compensation components. These elements should include a strategic blend of core benefits, executive benefits, qualified retirement plans, supplemental retirement plans, salary, short-term incentives, long-term incentives and long-term equity incentives.
Ultimately, the proverbial “rubber meets the road” when a rewards plan prompts employees to rise to a higher level of performance. For rewards to be effective they must create increased focus on the part of participating employees — this focus is a direct result not only of financial reward, but also of a positive work environment and the path that you, as company owner, have drawn for their personal and professional development. Remember, money may be motivating, but so is an atmosphere where a culture of confidence exists.
At the end of the day, compensation can only do its part in changing results within an organization if the model and compensation plan are understood and valued, if results are achievable, and if employees are committed and feel a sense of ownership. Results must be concrete, measurable and communicated regularly. If these elements fall into place and key people are being paid and rewarded appropriately business leaders will also know what they’re getting in return.
At the heart of an effective rewards and incentive plan is the proper identification and solidification of key compensation philosophies and priorities. This helps to achieve a unified financial vision for growing a business. It can distinguish the relationship between company and employee wealth-building goals; establish the framework of an employee and executive compensation philosophy; and identify factors which will impact desired performance.
The importance of a rewards program that addresses the growth and wealth building needs of both the company (ownership) and the individual (key employees) cannot be overstated, for far too often a “disconnect” exists between the two.
An overall diagnostic of the existing rewards program is best conducted by gathering data that addresses the business owner’s vision for the company’s future and growth expectations. Key staff members should be asked to specify their individual objectives in relation to the company’s performance and anticipated growth. Ultimately, this process will help to ensure that the company’s compensation philosophy is built upon a proper and lasting foundation.
There are many potential components of a long-term incentive program, including deferral plans, phantom stock and company stock options. These are sound compensation avenues that clearly demonstrate allegiance to key employees, but all too often company heads can get hung up on the word “compensation.” The framework of an incentive program becomes compromised when the company looks at compensation as an expense, not as an investment.
The fundamental focus of an incentive plan becomes blurred when its full potential value is not regularly and powerfully communicated. Here is where corporate leadership needs to focus the message in a laser-like fashion. Failure can also lurk in the absence of clear standards and methods that establish values consistent with the company’s growth needs and employee expectations; without this critical communication in place key talent may depart if offered a better value proposition — or a more clearly defined one — elsewhere.
Essentially, short-term incentives are performance-measured and typically paid out in 12 months or less. These incentives can play a large role in engendering an employee’s sense of investment in an organization if they are based on the achievement of certain departmental goals and/or hitting a profitability threshold.
Most organizations utilizing short-term incentive components as part of an overall ownership approach will weigh the incentive based upon a tier system. As such, tiers are established for different classes of employees in conjunction with their impact on various performance measures.
For example, incentive for Tier 1 or top level management is usually based on company performance, not department or individual contribution. Incentives for Tier 3 or 4 employees, however, are heavily weighted on team and individual performance, and hardly at all on overall company achievement. The objective with both tiers is to create focus and tie incentives to specific goals that the employee is best positioned to help meet — in other words, allowing an employee to feel engaged and invested in the workplace, which translates into that coveted ownership mentality.
Long-term incentives, which can include shares of stock, stock options, phantom stock, a profit pool or incentive deferred compensation, are usually designed for top talent retention.
Key among the intentions of long-term incentives is to create a focus on attaining the company’s long-term financial goals and engender a sense of investment in those goals.
Long-term incentives provide a substantive reason for top talent to both join and stay with a company. Attractive inducements can “reel them in” and likewise maintain star employees.
Sustained growth and hitting those important goal milestones occur when key employees are motivated to focus on performance, leading to execution and a pattern of continued achievement — in the long run, a win-win for both the company and its employees.
So here’s the bottom line from this “Grinch.” There’s nothing wrong with the tradition of the holiday bonus, but with the right mix of incentives, the celebration can last year round…for employees and the company alike.
Moniz is President of Northeast VisionLink (www.northeastvisionlink.com), an executive compensation design and management firm focused on serving the growth needs of businesses. He can be reached at firstname.lastname@example.org.
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