Business How-To: Implementing an Incentive Plan to Motivate Employees

Incentive programs are not new: weren’t you rewarded if you brought home a good report card or cleaned your room? That, in its most basic form, is an incentive program — rewarding good behavior.

However, employee incentive programs tend to compensate those employees who go “above and beyond” their typical duties and excel in ways that help the company achieve a higher profit margin, make more sales, garner more leads, etc.

An incentive also gives the employee a more personal stake in the company’s mission; if the company excels, the employee benefits.

Depending on your company’s goals, an incentive program can push workers to perform more efficiently, according to Victoria Downing, president of Remodelers Advantage and a regular REMODELING columnist. “It’s a carrot to get people to do their work faster and better,” she says, adding that one of the trickiest parts about incentives is being sure the goal is clearly understood and thinking through how it will affect the whole company.

Bob Ender, president of DreamMaker Bath & Kitchen, in Ann Arbor, Mich., instituted an incentive program in 2008 for his production staff and in 2010 for his sales team (including himself) so that he could easily spot any production problems. “We saw repeat issues of labor slippage throughout the industry and nobody could really put their finger on what it was,” he explains. “Owners always like to blame the guys in the field, but we knew there had to be more to it than that.”

The Right Incentive Plan

There are as many types of incentive program as there are uses for duct tape. Depending on what you hope to achieve, you have to decide which type works for your company and your employees. According to Jennifer Loftus, national director at Astron Solutions, a New York–based human resources consulting firm, there are three main categories for incentive plans: individual, group, and company. “Individual plans reward each employee based on their own merits and can be tailored to suit the employee,” she explains, adding that the rewards can range from cash or gift cards to trips, tools, and so on.

Group plans are for individual work groups. Each group would need to adhere to a set standard or measure. “For every single employee, there has to be a line of sight,” Loftus says. “An employee must understand how his performance affects the company’s goals.”

The companywide plan is typically a standard profit-sharing program: if the company meets — or exceeds — its goals for the year, quarter, or month then the entire company gets a piece of the action.

Loftus says that while company­wide plans weave in very nicely throughout an organization, some employees may still not have that clear line of sight as to how their job affects the company’s overall profitability. “If an employer wants to send a message that ‘We are a team,’ an organization-wide incentive or profit-sharing plan is best,” she says.

Pleasant Surprises

It’s not unusual to reap unexpected rewards when you institute any type of new management program for your business. Incentive programs have the potential to provide a wealth of unintended consequences. When Bob Ender at Dream­Maker Bath & Kitchen instituted the incentive programs for his sales and labor teams, he realized some surprising benefits.

• Equitable pay structure. Now there’s one pay structure across the board, according to Ender. “So there’s no bickering amongst employees and no animosity because everyone’s on the same pay scale,” he says.
• Increased customer satisfaction. In an industry notorious for running jobs longer than estimated, DreamMaker consistently beats deadlines, Ender says, adding that this has led to improved customer satisfaction numbers in his GuildQuality survey results.
• Better cost control. Because deadlines are being met, there are fewer unplanned manhours to pay for. Idle time and lumber runs are also down.
• Improved estimating. “Because the database is improved, we see less general slippage from a company standpoint and therefore we’re seeing fewer change orders,” Ender says. This not only makes his clients happy, it also leads to more thorough proposals by the sales team.
• More checks and balances. Now the workers keep an eye on one another’s progress because they don’t want someone’s lackluster performance to affect their own compensation.

Just Do It

Once you decide which type of program is right for your company, what you’re going to measure (profits, sales, number of change orders, etc.), who’s going to participate, and who’s going to administer it, the next step is letting the participants know what’s at stake.

Loftus advises the slow and steady approach. “Incentives can be very powerful from a positive perspective as well as from a negative perspective, so an owner would not want to accidentally go down the wrong road and put together a plan that wasn’t thought through,” she says. “So it’s better to wait a little bit of time to make sure your proverbial ducks are in a row, so when the plan does launch it is a success.”

Loftus recommends checking metrics over time to determine whether your employees are hitting their marks and what issues are keeping you from meeting your goals. “Let the workers know sooner rather than later, so they don’t find out two weeks prior to payout,” she says. “This also gives your employees time to adjust their work. Constant monitoring and sharing will keep people motivated.”

At the end of the designated time period, you’re probably going to have to make a few adjustments, or maybe even overhaul the entire process. “The company changes, the economy changes, so there are always tweaks going on,” Loftus says. “Incentive programs are living, breathing things and they need to be watched and changed to support the company’s goals for the future.”

Incentive Plans Are Not for Everyone

Just because some companies have success with an incentive program doesn’t guarantee that it will work for your business. You can’t use an incentive program to make up for low pay or the lack of other benefits, Loftus says, adding, “Incentive plans are pay that is at risk, so it is not guaranteed to an employee.”

Incentive programs are also not recommended for companies that have just one or two lead carpenters. “You’ll likely end up estimating to the individual rather than to the task,” Ender explains. He says that unless you’re doing at least $1 million in annual sales, an incentive program might not be right for your company.

Loftus points out that another problem with smaller companies — especially LLCs — using incentive programs is that the owner must be transparent with financial information in order for the incentive program to work properly. “You have to be comfortable sharing metrics and data and information about profitability,” she says. “If you’re not, then don’t implement an incentive plan.”

Finally, Downing says that you might not really need an incentive program in the first place. “Most people want to do a good job and they want to excel,” she reasons. “So you could be throwing something into the mix you might not want.”

As for slippage issues, Ender’s incentive programs revealed problems in production and sales. He now uses checklists to prevent missed labor.

—Mark A. Newman, senior editor, REMODELING.