Designing Bonus Plans That Cut Business Costs
What are some smart approaches to designing company-wide incentive programs? Bonus incentives are powerful tools and can both create success or wreak havoc. Careful planning is key. HR expert Stacey Carroll, director of customer service and marketing at PayScale, recently addressed the following questions during a webinar titled Aligning Your Compensation Strategy with Business Priorities:
Q: You have been asked to design a company-wide incentive program that is applicable across multiple departments with a goal towards cutting operating costs. What could be some potential pitfalls and how could you design the program to mitigate these issues?
A: If you’ve worked in HR long enough, I’m guessing that you are going to chuckle along with me if I tell you that, if you design an incentive program and you have a loophole in your design plan, your employees will find it. Not to stereotype but a lot of times the incentive plans are used in sales and those folks are very savvy. So, you have to be careful when designing bonus plans.
Let’s say that you have a business priority to cut operating costs and you want to set up a bonus plan so that you achieve that goal. And, you don’t want the plan to work against your goals and cause problems.
How to Set Up a Bonus Plan that Cuts Business Costs
1. Consider trade-offs. The first thing you need to consider is that there could be some trade-offs. For example, quality and safety are two areas where you do not want trade-offs to happen. So, you are going to need to build incentives into the plan that account for all company goals. They should take a look at the quality and safety element, as well as the profit issue.
2. Cuts for the short term, not the long term. I will tell you, and all HR professionals know, that there is one quick and easy way to cut costs. That solution is to cut people. And that may be the right strategy and that might be the right decision, but you’ve got to make sure that when the cuts are being made that they aren’t too significant and that they aren’t short-term cuts that are going to later hurt you in terms of your long-term priorities.
I recommend that you limit staffing cuts. Maybe the limit is as basic as requiring a secondary approval process before an employee is cut. Another thing you can ask is that your managers prepare an impact analysis. That analysis could include answers to questions like “How is the work going to get done?” and “What are the new job descriptions like?”
The analysis could cover a lot of different things. But it should be, again, tied into the incentive.
3. Be smart with cuts that have an impact on other departments or divisions. If everybody in the company is making their decisions in isolation, one department could decide to make a cut that impacts another division. What you want to do is have divisions work together on cost-cutting. The incentives should be designed by a cross-function team.
Also, make sure that the cuts are proportionate to the division’s overall budget. You can’t tell everybody, “You need to cut $100K” if one person’s budget is $100,000 and another person’s budget is $1,000,000. This may seem self-explanatory, but you really need to be careful in how you incent folks. Because, that would mean that for some managers the plan may be a piece of cake but for other managers it is nearly impossible. You don’t want the incentives tied to an impossible measure instead of an easily achievable measure. That approach won’t get you to what you’re trying to accomplish.
Director of Customer Service and Education
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- Lessons from SHRM San Diego 2010
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