Last month we took a look at Profit-Based Allocation as a basic approach for company executives to consider when developing incentive plan indicators; this month we’ll explore Targeted Key Performance Indicators (KPIs) and how they can lead to improvement in profits.KPIs generically constitute incentive plans that are within the reach or control of employees, the theory being that the easier it is for employees to reach their goals, improvements in company profits will be the outcome. The KPI approach can involve company, department or individual metrics, but in order to achieve the best results the right metric must be selected. Company metrics could be a combination of revenue growth and net income and might include return in equity, return in assets, gross sales, net income, revenue per employee and profit per employee. Departmental indicators could include gross sales and margins, overhead percentage, production quotas, client referrals, and employee retention percentage. Individual metrics are tied to personal performance goals.While Targeted KPIs can achieve good results, down sides do exist:
-Miscalculations; KPI improvements sometimes do not sufficiently offset failures in other areas, leading to incentive payments even though profits are off the mark.
-“Gaming”; some employees may learn how to play the system and achieve KPIs without hitting profit goals, resulting in intentional or unintentional failure to achieve profit objectives.
-“Sandbagging; there may be a few employees who barely reach their targeted KPIs during the allotted time period, and then attempt to carry-over performance into the next period, leading to failure to achieve full profit potential.
-Misalignment; KPIs can sometimes force employees into action outside their skill sets and abilities. The KPI may be achieved, but job satisfaction could be diminished.A single solution to designing an incentive plan with universal effectiveness simply does not exist – measures and metrics must be suitable and specific to the company and industry and based on an organization’s culture, business model and goals. By making a decision about which incentive plan indicators works best for your company, staying the course and tweaking when needed, the results in terms of both profitability and employee commitment will be evident.
About our Benefits Installment Author: .jpg)
James E. (Jim) Moniz, CEO of Northeast VisionLink, a Massachusetts firm that specializes in structuring executive compensation. James E. Moniz is a national speaker on the topic of wealth management and on executive compensation. Jim Moniz will be presenting at this years SHRM conference in Phoenx, be sure to check out our presentation: “Creating and Sustaining a Competitive Advantage, The Role and Impact of Effective Compensation and Rewards Strategies”
In order to appropriately establish measures for a comprehensive incentive plan and determine which core approach will be taken to develop a program, company executives must first understand and embrace a few foundational principles.These foundational principals boil down to three goals – creation of an incentive plan that not only improves profits but is also drives results and is self-financing (paid for with results realized). These principals pilot two basic approaches that company executives should consider in the development of incentive plan indicators – Profit-Based Allocation and Targeted Key Performance Indicators.We’ll concentrate on Profit-Based Allocation for this month’s posting, and have Targeted KPI’s to look forward to next time.Under the Profit-Based Allocation method, a company decides that it will allocate a percentage of annual profits to employees; the award amount is divided among employees based on a pre-determined formula with payouts typically occurring at the end of the year.A “best practices” framework for a Profit-Based Allocation should address the following issues:-Define profits, be it net income or another measure-Establish a baseline upon which contributions to the profit pool will be based-Identify a threshold to ensure that a certain measure or series of measures will be achieved prior to payments being made-Select a fixed or tiered percentage to share -Select an allocation formula to determine how the value will be distributed to participating employees-Establish a personal performance component to clarify the performance threshold that must be achieved to receive benefitsKeep in mind that since the single focus of Profit-Based Allocation is on annual profits, the value created can lead to some inherent drawbacks. Some examples might be: long term needs are overlooked, individual accomplishments are not recognized and it can be possible to “cook the books” shorterm to impact a bonus. Seeing that this approach has its anchor in company performance, the absence of a strong performance management system or an apathetic workforce can compromise the effort.Next month we’ll examine Targeted KPIs and how they can lead to improvement in profits.About our Benefits Installment Author: James E. (Jim) Moniz, CEO of Northeast VisionLink, a Massachusetts firm that specializes in structuring executive compensation. James E. Moniz is a national speaker on the topic of wealth management and on executive compensation. Jim Moniz will be presenting at this years SHRM conference in Phoenx, be sure to check out our presentation: “Creating and Sustaining a Competitive Advantage, The Role and Impact of Effective Compensation and Rewards Strategies”
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James E. (Jim) Moniz, CEO of Northeast VisionLink, a Massachusetts firm that specializes in structuring executive compensation. James E. Moniz is a national speaker on the topic of wealth management and on executive compensation. Jim Moniz will be presenting at this years SHRM conference in Phoenx, be sure to check out our presentation: “Creating and Sustaining a Competitive Advantage, The Role and Impact of Effective Compensation and Rewards Strategies”
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