Words: Damian Lang
Photo: Hill Masonry Inc.
Incentive programs are powerful tools to motivate and engage employees. They serve to incentivize them toward top performance. However, they only work if they are easy to understand, properly communicated, and backed by the integrity of the company.
During an interview with a candidate for one of our management positions, I inquired why he quit his last job. His explanation was simple: His boss promised a year-end bonus of $10,000 but only awarded him $6,000. His response is not unique. I recently spoke with a man who left his job and took a position paying $30,000 less annually because after working his tail off, he could not get an explanation why his annual bonus was smaller than the one he previously received.
To motivate employees, business leaders sometimes make vague commitments. However, when the dynamics of the situation unexpectedly change for one reason or another, they may be unable to follow through on their promise. As a result, there is distrust on the employee’s part. An otherwise good relationship has soured which, like the two examples above, can lead to the loss of a valuable member of the company.
With our companies, it is important that our employees understand what we are doing. I intentionally call our plans incentives instead of bonuses. The word bonus typically implies an unexpected gift. An unexpected gift may motivate someone short-term, but with no clear metrics as to what the extra pay is based on, future bonuses must be the same or more to continue to motivate employees. An incentive is something given based on clearly laid out objectives. It encourages behavior that helps the company accomplish its goals while ultimately resulting in a benefit for the employee. Employees do not mind sharing in good times and bad if they clearly understand why their incentive amount has changed.
We utilize incentives at all our companies and over the years, we have tried a variety of plans. In fact, in 2004, I compiled my knowledge on the subject and wrote, “RACE—Rewarding and Challenging Employees for Profits in Masonry.” That year our total sales were $11 million. Incentives are part of our business plan because when administered properly, they work. This year we anticipate our combined business sales to exceed $150 million with a lot of happy people that benefited from that growth together. While I credit ownership sharing (which is an incentive plan in itself) as a huge factor in our success, our incentive plans are equally important in contributing to our overall growth and income.
Our incentive plans are not complicated and, quite honestly, have not changed significantly since I wrote my book 18 years ago. For every incentive plan we implement, we explain to the employees that if it does not work the way it was designed to, we will make changes. Or, if needed, we will create a completely new plan. Then, when the incentives are distributed during the quarterly meeting, we listen to the concerns of the employees. Our goal is to keep communication lines open as to how their incentive plans work. We let them know our goal is to ensure the plan is mutually beneficial to all parties.
For our management staff, truck drivers, mechanics, and basically everyone except our field workers:
- We pay one-third of their total incentive-based on total sales collected for the year. This encourages everyone to not only want to grow sales but to collect the money for the sales we do. The sales goal for each employee remains the same as it is the year they started at the company. So as sales grow in the future, the employees are rewarded for being part of that growth. Knowing they are benefiting as we grow, everyone desires to drive growth.
- We pay two-thirds of their incentive-based on net profit percentages. This keeps everyone focused on the bottom line, which includes saving on labor, equipment, supplies, etc. We want everyone to realize we want to drive growth, but not without maintaining our desired net profit percentages.
- We decide the amount to pay each person by taking the amount of incentive we can afford to pay if we hit our goals (everyone is different based on their level/position they hold at the company) and divide it by the yearly goal for total sales and net profit we desire.
Our management staff incentive plans have been in place and worked successfully for many years, with a few tweaks after listening to the concerns of the employees.
Over the years, we have made adjustments to our incentive plan for field employees. Previously we focused only on labor. In doing so, we found that they neglected things such as materials overage, and even loaded jobsites with extra equipment to increase labor sales. As a result, we simplified the field employee plan, and it has since been working well for us and our teams.
For our field employees:
- We pay field employees 20% of the net profit (after taxes) we earn. We divide the monies by all field employees based on the number of hours they work each quarter. In other words, if someone worked 122 hours in a quarter, they would receive twice as much as someone who worked 61 hours the same quarter. Furthermore, the incentive for the quarter is not awarded until the end of the following quarter. This gives our finance department time to do the P&L and process the incentives. If employees leave the company before the incentives are paid, they are leaving six months of incentive money on the table. We have found this to be an effective means of maintaining a consistent workforce.
If you have made the decision to implement an incentive plan, it is imperative that you stand behind your word. Give your employees what you have promised. Defaulting on a promise or an incentive to your workforce can be detrimental to your business. From the employees who do not resign, you are left with people who no longer have confidence in you and have no desire to help your business grow. Bottom line: Do what you say.
In conclusion, an incentive plan is not a silver bullet. Let go of the dream that if you put a great plan in place, it will fix all your issues and you can simply be done with that worry. Nothing could be further from the truth. These plans must be thoughtfully laid out and administered. Otherwise, things can end up being worse than no incentive plan at all.
Anticipate investing a significant amount of time to create the plan that suits your business goals and makes your employees happy. An incentive program can be tremendously beneficial to an organization, but it is critically important that it is implemented properly to avoid potential problems. Keep your plans simple and communicate with your employees so when issues arise – and they will – you can address them directly and with as much transparency as possible to ensure your employees are clear about the program’s expectations and goals.