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Is Your Incentive Plan Working?

We have seen it everywhere throughout the past year: employee productivity is down. How can business owners combat this decline in productivity? When base wages aren't working to drive high output, employers can try incentive plans. How these plans are structured is the difference between success and increased costs with no actual effect on productivity.

The first thing to consider when structuring an incentive plan is what success looks like. What behavior or result are we hoping to achieve through the plan? Can we identify a specific behavior or action as the key to productivity? A common mistake we see in incentive plans is a failure to determine the key step for success.

One client we work with identified sales volume as the key to success. They gave their sales team quarterly sales targets to hit. At first, the plan looked to be a success. Sales were up significantly, and the sales team was making more money than ever. Before long, however, issues began to arise. Despite higher-than-ever sales, profitability began to decline. A closer look revealed the root issue: margins had declined. In pursuit of sales dollars, the sales reps focused on selling high-dollar but low-margin products. Under the incentive plan, the sales reps were doing their job and seeing success, which came at the expense of the business's health. The plan was reworked to incentivize margin dollars from sales rather than simply sales. This change in the plan refocused the sales team from looking at net sales to instead focus on margin dollars from sales. This resulted in success for both the sales reps and the business

Another of our clients saw success with a different kind of incentive plan. For this company, sales were not the problem. Instead, they struggled with employee attendance and productivity. Management realized that increasing employee attendance, productivity, and profitability would follow suit. They instituted an incentive plan based on attendance: Employees who worked their assigned shifts for the week would receive a bonus. The success was resounding. Attendance saw a sharp uptick, and productivity increased.

If you are considering an incentive plan, take a second and think about what success looks like. Can you identify the actions that lead directly to success?


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