Four Rules for Motivational Incentive Compensation Plans

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Four Rules for Motivational Plans

Many trucking companies use incentive plans for their sales reps and recruiters and the trend is toward increased use of pay for performance programs for drivers, driver managers and other roles throughout the company.  This article will provide the four rules for ensuring your plans provide the right balance between motivation and business results.

The four rules for Motivational Incentive Compensation Plans or “watch words”

  • relevant,

  • controllable,

  • measurable

  • objective

Whenever you implement an incentive plan, you should compare each performance measure in the plan to these words to see if it passes the test. A “performance measure” is the metric by which you are gauging an employee’s results. Common performance measures are: miles, safety, MPG, tenure, number of recruits, revenue, profit new customers, truck utilization, labor cost per week, number of customer calls, etc.

Relevant:

When considering a measure, first and foremost ask yourself “is this relevant to the health of the company?” If someone does this really well, will my top or bottom line show a direct impact? If they do it poorly, can the business be hurt seriously?

Most of the performance measures listed above pass this test…but some do not.  One questionable one from the list which is sometimes used for inside sales reps is “number of customer calls.” It doesn’t take much thought to realize that if you pay for making lots of calls, you will get…lots of calls. However, this doesn’t say a thing about how much business you will get. Be sure you are paying for results that matter to your business.  For drivers, miles is often the most relevant measure for the business as truck utilization can make or break a company’s OR, but you need to be careful not to over-reward or you risk safety and HOS violations.

Controllable:

Can the employee influence the outcome? If the answer to this question is “no” then you are not developing an incentive plan—you are developing a profit sharing plan. For an incentive plan to be motivational, the employee must be able to positively or negatively impact the results.   One of the real tricks to successful incentive design is mapping out how each person’s role in the organization impacts that results that matter to the business, and then seeing which of these measures pass the next two tests.

Measurable:

If you can’t measure it, you can’t track it and you better not try to pay for it. Many of the performance measures that pass the first two tests fail this one.  Always consider the balance—what will you gain by using the performance measure in an incentive plan versus what will it cost for you to measure, track and report on the results. Many good performance measures have landed on the cutting room floor of plan design meetings because their cost is not worth their benefit.

Objective:

This last one can make or break the perceived fairness of an incentive plan. Managers of small business or teams, or groups that do many alternating functions, often want to revert to a subjective evaluation based on manager observation of performance. Or, subjective measurement may be suggested for roles where there is no real performance measure that passes the first three tests but management wants the employees “to feel like part of the team.”

Subjective measurement tied to incentive pay is dangerous territory and can become cause for a discrimination suit. Regardless of how objective the manager believes him or herself to be, an employee who is rated poorly is not likely to say, “Yes, that’s right, I screwed up.” This is not human nature. Upon hearing negative feedback, most humans move into “ego protect” mode and look elsewhere to lay the blame, rather than accept the criticism as valid.

In summary, when used in the proper way, incentive plans can be powerfully motivational and can drive employees to higher levels of performance—helping management balance risk, costs of compensation and improve employee morale and sense of purpose. However, if the four rules above are violated in the plan, you will no longer have an incentive plan—you will have a disincentive plan.

 

This excerpt was originally published in the March 2014 issue of Overdrive.

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