Incentive Plans

A good incentive plan will have the following characteristics:

Here is a plan designed to make cost cutting as important to your employees as yourself:

  1. Set a percentage of profits that you are willing to share, say 15% of pretax earnings.

  2. Each month compute the profit sharing bonus by taking the year-to-date profits before incentive plan payments times the 15%. Take the result and subtract the year-to-date incentive plan payments. The balance is the current months bonus pool. Using the year-to-date numbers avoids giving people a bad incentive to make one month a good month at the expense of the next month.

  3. Split the bonus pool between all of the middle managers and line personnel. Seniority should be entitled to more shares of the bonus pool than a new hire.

  4. Make the bonus payments on the next pay cycle. Make sure you include with their checks a graph of sales and expenses along with the bonus calculations and a list of each employee's share.

The bonus pool approach has a better chance of significant improvements rather than individual awards. This is because you and others have already made the obvious and easy cost cuts. The remaining cost cuts will require interdepartmental team work to achieve.

All incentive plans have unintended results that must be managed. Senior management, who are not participants in the incentive program, will need to plan on regularly publishing new ground rules as they discover these unintended results. It is absolutely amazing the lengths that some people will go to in order to beat the system.

10/25/00

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