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Incentive Compensation in Unprecedented Times

Q: Is it possible that an incentive plan was good during robust economic times, but isn’t good when the economy is in serious recession, like now?

A: Yes. If the plan is inherently well designed, the big change that’s required is to reset performance objectives, particularly quantitative ones. These need to be realistic to avoid setting up employees for failure. Nothing is more demotivating than unattainable targets. The challenge is determining what’s realistic!

The conflict is how to reward and motivate performance vs. the cost of the plan. The next step, after changing the targets to realistic levels, is to lower the incentives, the amount that can be earned for meeting or exceeding performance targets.

We know a number of clients who have simply said “No incentive payouts! We just don’t have the funds!” If you choose to do this, just make sure that your top performers understand the situation, that you are seen to be fair and consistent, and that there is still an opportunity for them to be rewarded as your organization recovers.

Q: What are some other things a business might do when the economy is sour?

A: Here are a few options to consider:

  • You can defer a portion or all of the incentive, contingent on the company’s turnaround.
  • Sales spiffs or special incentives may motivate performance and would be a low incremental cost relative to contribution from the additional sales. This applies equally in the development area for not-for-profits, whose lifeblood is sponsorship funding.
  • If you have a sales operation, let the weaker people go and concentrate your business in the hands of the top performers. You want your top producers to be making money.
  • Make sure that your customer service infrastructure is working, from order taking through shipment, to avoid any excuse for customers to switch suppliers.

Q: Should you cut salaries?

A: You would want to do some other things first.

Obvious courses of action are to reduce salaries proportionately or to reduce hours worked for line workers or hourly workers. However, a cardinal error is to make everyone bear the same proportionate burden. This is the time to eliminate weak employees, particularly those who have somehow sailed under the radar screen with insufficient reason to terminate. The fact is that reducing pay for top employees who consistently produce is inequitable. While you may have a sense of moral burden, it may be a question of your company’s survival to let the weak performers go.

Once you have eliminated the weak employees and if the financial burdens are still significant, you may be forced to cut salaries and hourly time worked. However, it is important that your company is fully aligned and that all employees are motivated and focused on pulling together for survival. Some of our clients have reported how staff have willingly come together and truly displayed amazing teamwork, despite the hardships.

As an aside, you may also use the opportunity to recruit some additional talent now available in the job market.

In summary, drastic times don’t always call for drastic measures in changing the structure of your compensation plan if you make use of some fundamentals of good plan design:

  • Define a new set of objectives with realistic targets.
  • Reduce targeted incentives to lower levels (% of incentive to base salary earned at 100% of performance).
  • Set a relatively low threshold for payout against plan, to commence with low payouts, gradually increasing as performance moves to 100% of overall target.
  • Continue to pay beyond targeted incentive when targets are exceeded.
  • Add spiffs for special sales, products or customers.
  • Ensure there are company goals to create a company drive for survival and success to keep all aligned and motivated. Company performance should index payouts.
  • Reserve a portion of the incentive earned, creating a pool of deferred funds, contingent on the company returning to profitability and normal operations.
  • Be transparent with your operating results.

It’s not easy keeping employees motivated during tough economic times.

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