PAYING FOR PERFORMANCE
Advice on improving the effectiveness of your group incentive plans
Excellent implementation rather than good design is the key to making group incentive plans work. This is the main conclusion in the latest of a series of influential studies by the USA-based Consortium for Alternative Reward Strategies Research (CARS), published in the current edition of WorldatWork Journal.
It’ s a fascinating study with numerous practical insights for those who are struggling to get the best out of their group incentives.
Group incentives all the rage in the USA
The growth of group incentives and gainsharing schemes has been nothing short of spectacular in the USA. Indeed, the consensus among pay specialists across the Atlantic is that as many as seven in 10 major American corporations operate some form of collective incentive.
The thinking behind these schemes, in which employees’ pay packets are tied to strategic business objectives — whether financial, operational, customer-related or some combination of the three — is straightforward and compelling. As the new CARS study explains:
At their best, group incentive plans give employees a new voice and stake in company success and ask as much of their minds as their hands. They use the power of teamwork to persuade work teams, large and small, to rally behind a common cause and then share in the success. The intended payback has improved company performance and put more cash or incentive awards in the hands of employees. Such plans create a workforce more aligned with business goals, better educated about what contributes to business performance and more committed to ongoing success.
Formidable stumbling blocks
Why, then, are some group incentive schemes more successful than others? Far too frequently, managers do not buy into the plan nor support it, the plans are overly complex and they are poorly communicated, according to the CARS research.
Although there is no magic formula for developing an effective group incentive, one of the real problems often lies with the way they are communicated, the report says. (See box below: Three essential ingredients of effective plan implementation.)
The solution is to communicate as often and as openly as possible. Companies with successful plans remind employees in good times and bad what’ s happening, where they stand, and what hitting the targets can mean in terms of a pay-out.
Three essential ingredients of effective plan implementation
| 1. Local management support matters |
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| 2. Staff must understand the plan and how to influence plan measures |
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| 3. Top of the mind = top of the charts |
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Source: adapted from Making group incentive plans work , by Jerry McAdams and Elizabeth J Hawk, WorldatWork Journal, third quarter 2000.
The findings from one of the world’ s largest studies of group incentives also suggest that the effectiveness of group incentive plans is influenced in a big way at the plant level .
As Jerry McAdams and Elizabeth J Hawk, the authors of the report and co-directors of CARS, explain: Plants may have little opportunity to change the plant design, but they have other ways to influence a plan’ s effectiveness.
Try a broad mix of measures
It’ s clear that whilst group incentive plans may well offer some important advantages, their adoption and use is by no means a simple task. All too many organisations are disappointed with their plans. Why? Because organisations want it all , the CARS researchers say.
Leaders want to focus on creating shareholder value and increasing employee line of sight — the employees’ ability to see clearly the impact of his or her actions on results and pay-out. Unfortunately, these objectives often oppose one another.
Take, for example, unit or company profit-sharing plans. As McAdams and Hawk observe: Shareholders love them because they only pay when there are profits to share, but employees may not have a clue what they did (or can do next time) to earn the award.
In contrast, so-called family of measures plans do the best job of balancing shareholder value and line of sight. In the words of the CARS researchers: They deliver the broadest view of real performance — including operational, financial and customer measures, and often incorporate both leading and lagging indicators — and encourage business literacy.
But the successful investment in these plans involves a great deal of effort, commitment and expertise. As the authors explain: They have to be ‘ worked’ hard, and they may be seen as high risk. Done ‘ right’ , however, they deliver an optimum combination of higher shareholder value and improved line of sight.
Seven guiding principles for group incentives
So what can employers do to improve the effectiveness of their group incentive plans? Based on the tranche of data assembled for CARS IV, together with experience from the trenches , the authors put forward seven recommendations.
There is no one silver bullet in the list of techniques that they associate with effective group incentive plans. These basic principles might seem like obvious common sense, but sadly all too many managers do not follow them. Firms could do a lot worse than apply some of these insights to give them the edge.
The key recommendations are these:
| 1. Design your plan well but do a great job implementing. |
| 2. Do not use group incentives to replace a well-thought-out and articulated business strategy. |
| 3. Ensure that the pay-for-performance message is reinforced by other HR systems. |
| 4. Use individual rewards, where appropriate, to complement the group incentive plan. |
| 5. Make sure employees understand the measurements and what they can do to influence them. |
| 6. Communicate, communicate, and communicate. |
| 7. Do not attempt to institute incentive opportunities at the expense of base salaries. |
Source: Making group incentive plans work , by Jerry McAdams and Elizabeth J Hawk, WorldatWork Journal, third quarter 2000.
Words of wisdom
Use good design principles and communicate, educate, engage and celebrate. Make it a top priority to get the right kind of leadership in place. Continually ‘ work’ the plan as you would any key business strategy. Operating a plan on autopilot usually invites employees to put it on their own back burners. — Jerry McAdams and Elizabeth J Hawk.
Want to know more?
Title: Making group incentive plans work , by Jerry McAdams and Elizabeth J Hawk, WorldatWork Journal, third quarter 2000.
Methodology: the seven-page report is based on information gathered as part of the fourth in a series of long-running studies examining incentive plans. Undertaken by the Consortium for Alternative Reward Strategies Research (CARS), the research uses a case-study approach. It draws on information from 1,200 employee surveys, 22 focus groups, interviews with 75 plant managers and corporate HR staff and more than 150 plan documents.
Sample size: 11 plants.
Availability: contact WorldatWork, 14040 N. Northsight Blvd, Scottsdale, Arizona, USA AZ 85260, tel: 001 480 951 9191 or email worldatworkjournal@worldatwork.org
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