Brad Hill

1
Stop Fussing with Your Incentive FormulaGetting
Your Priorities Right

• Brad Hill
• Tandehill Human Capital
• Creative. Responsive. Practical.

2
You Fussed with It. . .Didnt You?

• Its perfect. . .yet a tad complex.

3
Four Objectives of Incentive Pay

• Thank You
• Equity (Market/Internal)
• Cost Control
• Value Added

Target Formulas
4
Will This Incentive Program. . .

• Raise employee competence?
• Improve business processes?
• Effectively communicate successes/failures?
• Harness employees discretionary effort?
• Keep score of employee success?

5
Incentives. . .Part of a Bigger Picture
What are we trying to improve? What is the
employees line of sight to improvement? What is
the plan for ongoing communications?

• What?
• How?
• Why?

Business Success Factors
How are we going to improve? How will the company
capture successful practices? How will the
company leverage competencies?
Process Improvement Techniques
Why are we going to improve? Why are employees
going to work harder and smarter? Why will the
company pay employees more?
Productivity and Rewards
6
Designing the Incentive... Dont Go It Alone
The Incentive Pay Design Team
7
The Formula. . . One of Several Deliverables

• The Design Team was assembled in order to develop
  a recommendation to leadership regarding
• an incentive formula
• an employee involvement/process improvement
  methodology
• a personal impact map/business communication plan
  
• definition of key competencies

8

• Formula

9
Goals of Most Formulas

• Pay high performers even more.
• Ensure the plan does not support windfall
  payouts.
• Punish poor performers.
• Eliminate any feelings of entitlement.

10
What the Formula Should Do. . .

• Keep track of employee success.
• Communicate business priorities.
• Encourage the right behaviors.
• Lift all employee performance to a higher level.
• Support continuous improvement.

11
Some Target Formulas are Better Than Others,
Right?
ILLUSTRATIVE
12
Put Some Science Into the Target

• Leverage Tied to Odds of Achievement

13
Self-Funding Formula ... 10 Decisions
Modifier
Incentive Fund
Payout Pool
Multiplier
Rating
X

5 4 3 2 1
150 125 100 75 50
1. Funding Factors Asset Growth Deposit
Growth Expense Control Fee Income Market
Share Revenues ROA ROIC
3. Payout Factors Attendance Equal Dollar Equal
Percent of Pay Hours Worked Individual
Earnings Performance Rating Position Years of
Service
2. Modifying Factors Audit Results Branch
Openings Delinquent Loans Expanded
Relationships Loans Downgraded New
Customers Product Placement Referrals
Note The challenge is to design a plan using
only one item from each column.
14
Self-Funding Formula 10 Decisions
4. Participation

• Line employees
• Staff employees
• Part-time employees
• Summer employees
• Salaried employees

8. Company Protection

• Rolling payout
• Year-end opportunity
• Loss recovery
• Year-to-date gain
• Sharing formula

15

• Communications

16
Communications
17
Focus on Communications
78 of companies that thought the information
shared was very effective, felt the plan was
motivational
2003 Hay Group/World at Work research
18
Creating Line of Sight

• For an incentive plan to be successful, each
  employee must know how their actions impact the
  result.
• You have two choices.
• 1. Drill the metrics down to the employee level
  (creating 427 different plans and forcing you to
  hire a department of metric development and
  maintenance).
• 2. Ratchet up the employees understanding of a
  broader metric by creating a personal impact
  map.

19
How to Connect Employees to the Formula
3. Identify organization actions that affect
performance drivers
1. Start with key measure
2. Identify critical performance drivers
Receivables
Inventory
Property, Plant Equipment
Competitive Pricing
Other Investments
Reduce Costs
Materials
Labor
Deliver On Time
Overhead
Customer Satisfaction
Deliver a Quality Product
Be Responsive
Support Customer Initiatives
20
How to Connect Employees to the Formula
1. Extend from organization actions
2. Break into team and individual focus areas
Better Equipment Usage
Turn in unused equipment (e.g., printers,
laptops, microfiche machines, etc.)
Inventory equipment from PPE list and identify
excess/unused items
Equipment Not Used
Find secondary markets for unused equipment
Check with other divisions for possible transfer
of unused equipment
21
Personal Impact Map ... Sales Growth
Sales Growth
22

• Competence

23
Competencies Directly Correlate with Performance
What a Star Sales Performer Delivers
Hay Group Case Study of 44 Fortune 500 Firms
7,000,000
6,000,000
5,000,000
Average Annual Sales Volume
4,000,000
3,000,000
2,000,000
1,000,000
-
Top 10
Average
Ranking in Sales Force
24
Define the Profile of the Stars. . .
25
. . . But Develop All Talent

• Too much time can be spent motivating and
  rewarding superstars.
• Identify the competencies and processes used by
  your superstars, and try to leverage them across
  the organization.
• The real improvement comes from lifting up
  everyone.

26
Question 1

• The key to incentive plan success is. . .
• Getting the formula right.
• Modeling the plan under different scenarios.
• Motivating the right kind of behaviors.
• Punishing poor performers.
• Rewarding your top performers.

27
Question 2

• An incentive program does not include. . .
• A formula to track success.
• Ongoing communications.
• A personal impact map.
• Pay for competencies.
• Identification of behaviors/competencies to
  change.

28
Question 3

• Achieving optimal incentive plan ROI will come
  from. . .
• Getting high performers to improve 10.
• Taking pay from low performers and giving it to
  high performers.
• Getting low performers to improve 25.
• Improving processes and competencies.
• Setting a reasonable cap.

29
Conclusions

• The formula is just one part of incentive
  success.
• Think about improving everyones performance.
• Focus on processes and competencies.