Performance incentives Archives - Lighthouse Consulting Services

Win the War for Talent with a Cash Balance Retirement Plan

By Dan Kravitz

From the boardroom bunkers to the cubicle trenches, competition to hire the best and brightest is increasingly intense. McKinsey & Company’s recent CEO briefing report, “Talent Tensions Ahead” projected a hiring gap as high as 11 percent of demand for staff with advanced degrees by 2020. Moreover, in our competitive global economy, attrition rates are climbing in many organizations.

What can employers do to improve their competitive edge when it comes to recruiting and retaining talented professionals? Company-sponsored retirement plans play a crucial role. For many high income professionals, qualified retirement plans are one of the most important sources of lifetime wealth accumulation. Consequently, any organization that wants to win the war for talent must offer a highly competitive retirement package.

What makes a retirement package compelling to talented, in-demand professionals? A generous 401(k) profit sharing plan is a good starting point but no longer goes far enough. Adding a Cash Balance (hybrid) plan makes an enormous difference, allowing high earners to double or even triple their pre-tax retirement savings and compress 20 years of retirement savings into 10. Depending on age and income, these high earners may be able to move into a lower tax bracket after their firm adds a Cash Balance plan. This shift will significantly reduce the impact of the 2013 tax hikes.

What is a Cash Balance plan?

A Cash Balance Plan is a unique type of IRS-qualified retirement plan also known as a hybrid, since it combines features of both defined benefit and defined contribution plans. Financial advisors and CPAs often describe Cash Balance as the best of both worlds, offering the portability and flexibility of a defined contribution plan along with the high contribution limits of a traditional defined benefit plan. Cash Balance plans are almost always offered as an add-on to an existing 401(k) profit sharing plan in order to create an optimized tax-efficient plan design.

For example, a 55-year-old in 2015 is limited to $24,000 in 401(k) contributions and $35,000 in profit sharing. But if her firm added a Cash Balance plan, she could enjoy a tax-deferred Cash Balance contribution of up to $175,000, toward a lifetime limit of $2.6M. Combined with her $59,000 in 401(k) profit sharing, she would have total tax-deferred retirement contributions of $234,000.

Cash Balance plans differ from traditional defined benefit in several key ways which make them appealing to employees at all levels of an organization. Assets are pooled and invested collectively, but participants have individual accounts and can see their balances. Accounts are portable and can be rolled over to an IRA or another qualified account when retiring or leaving the organization. Participants can choose either an annuity or a lump sum option.

The Retention Power of a Cash Balance Plan

Let’s illustrate the concept by looking at the world of law firms. While it’s expensive to lose talented attorneys early in their careers, it’s even more devastating to lose them mid-career. Mid-career lawyers are often in their prime in terms of productivity, skill and client retention. Their loss can greatly affect the firm’s quality of work in addition to its bottom line.

A law firm’s retirement plan can be a crucial factor in an attorney’s decision to leave. Attorneys in their 40s have typically paid down student loans and have home equity, yet many feel far behind on retirement savings. Attorneys, like physicians, start later than many professionals in saving for retirement due to student loans and years of lower paid work as associates. If the firm doesn’t help them meet their financial objectives, they will probably find another firm that can.

The single most important step a law firm, medical group, or any competitive organization can take to improve its retirement plan is to increase pre-tax contributions so partners can grow their qualified retirement accounts while significantly reducing the tax burden. This can be accomplished by adding a Cash Balance plan to the retirement plan already in place.

Law firms making these Cash Balance contributions report greatly improved partner satisfaction with retirement plans. In fact, the majority of AmLaw 200 firms now offer Cash Balance plans or are in the process of adopting them.

“Having worked with many law firms, I’ve found them eager to find ways to reduce their tax burdens,” said David Roberts, a CPA with the Los Angeles firm RBZ. “One of the most significant methods I’ve seen them use is implementing a Cash Balance pension plan in addition to their 401(k) profit sharing plan. This allows them to dramatically increase pre-tax contributions to qualified plans, sometimes as high as $250,000 per year. Cash Balance is a complex plan that may not be right for everyone, but for those who can, I would strongly recommend that they look closely at the option.”

What About Non-Qualified Alternatives?

Facing the limits of a 401(k) profit sharing plan, some business owners and high income professionals turn to savings and investment vehicles outside of a qualified plan, such insurance products, deferred compensation arrangements, and after-tax retirement accounts. However, that means missing out on the enormous financial benefits of a tax-favored qualified plan, outlined here:

Top 5 Advantages of Cash Balance Plans

1. Reducing the tax burden
Funds contributed to Cash Balance Plans are tax-deductible, and the earnings grow tax-deferred until the money is withdrawn. This benefit is enormous and can have a dramatic impact on savings accumulation. At retirement, or when leaving employment, a Cash Balance account can be rolled over into an IRA. No taxes are due until age 70 ½, at which point only a portion of the money is taxed.

2. Accelerating retirement savings
For business owners and partners who have heavily invested in their businesses and feel behind in retirement goals, Cash Balance plans are a unique opportunity to “catch up” faster than any other option can provide. In as little as 10 years, they can receive contributions up to a lifetime limit of $2.6M, going a very long way toward a sense of retirement security.

3. Attracting and retaining top talent
Like all qualified plans, Cash Balance plans require contributions to non-owner employees, a requirement that becomes a key benefit for many firms. Money that would otherwise have gone to the IRS is now enriching both the employer’s and employees’ retirement savings, helping attract, reward and retain talented employees. Professional services firms find Cash Balance Plans a great incentive on both the partner level and employee level.

4. Shelter from creditors
Assets in a Cash Balance Plan are protected from creditors in the event of a bankruptcy or lawsuit. In volatile economic times, preserving profits from both taxes and creditors is increasingly important.

5. Protecting retirement savings from market volatility
Because plan assets are usually invested conservatively for actuarial reasons, Cash Balance accounts have avoided the dramatic fluctuations seen in 401(k) accounts over the past decade. While 401(k) account holders often rely on higher risk strategies to maximize growth, Cash Balance plans grow primarily through high contribution amounts earning interest rates that stay ahead of inflation without taking on major risk.

Learn more about Cash Balance plans and explore options with a complimentary plan design

Cash Balance 101- a simple guide to understanding Cash Balance Plans:
http://cashbalancedesign.com/cbc/documents/CashBalance101.pdf

Complete Contribution Limits Table:
http://cashbalancedesign.com/cbc/documents/ContributionLimitsTable.pdf

Visit www.CashBalanceDesign.com or call 877 CB-Plans to learn more about whether a Cash Balance plan would be a fit for your organization.

Dan Kravitz is the president of Kravitz, Inc., one of the nation’s largest independent retirement plan consulting firms. Dan is recognized as a leading national expert on Cash Balance retirement plans and is the author of a popular book on the topic, Beyond the 401(k). He is a frequent speaker at retirement industry conferences and has been interviewed on the topic of Cash Balance plans by many national publications, including the Wall Street Journal. At Kravitz, Dan leads a team of 75 skilled retirement professionals, including 10 actuaries, focusing on innovative plan design and the highest levels of client service. Kravitz manages retirement plans for 1,400 companies across the nation, including more than 500 Cash Balance plans. You can reach him at dkravitz@kravitzinc.com.

Inspiration and Techniques for Building Championship-Level Performance – Lighthouse clients have one thing in common – all are committed to boosting the performance of their organizations. So, we are pleased to introduce our clients and friends to Boaz Rauchwerger — speaker, trainer, author and consultant. We highly recommend Boaz to you. Ask him to deliver one of his inspirational programs at your next executive retreat or strategic planning session. One of our favorite Boaz programs is “Playing Like a Championship Team Every Day”. It helps you build on the strengths of everyone’s individual differences. This program helps you discover five steps to get everyone to join the building crew and resign from the wrecking crew. This is a very powerful and inspirational program that receives rave reviews every time.

• Master five techniques to inspire others to perform like champions
• Six recognition techniques including the powerful “good finder” program
• Learn four ways that your team can gain a competitive advantage
• Identify the three prerequisites for maximizing the team’s results
• Learn the two forms of keeping a daily score so everyone wins

Who is Boaz? Over a 30-year span, Boaz, author of The Tiberias Transformation – How To Change Your Life In Less Than 8 Minutes A Day, has conducted thousands of seminars internationally on goal setting and high achievement. He has taught over half a million people how to supercharge their lives, their careers and how to add Power to their goals. His innovative program, for individuals and corporations, is a simple and highly effective process for high achievement. He was voted Speaker of the Year by Vistage, an international organization of CEOs and business owners. How to Contact Boaz – Want more information on Boaz’s Power Program, including “Playing Like a Championship Team Every Day”? Just click here and we’ll be in touch.

If you would like additional information on this topic or others, please contact your Human Resources department or Lighthouse Consulting Services LLC, 3130 Wilshire Blvd., Suite 550, Santa Monica, CA 90403, (310) 453-6556, dana@lighthouseconsulting.com & our website: www.lighthouseconsulting.com

Lighthouse Consulting Services, LLC provides a variety of services, including in-depth work style assessments for new hires & staff development, team building, interpersonal & communication training, career guidance & transition, conflict management, 360s, workshops, and executive & employee coaching. Other areas of expertise: Executive on boarding for success, leadership training for the 21st century, exploring global options for expanding your business, sales and customer service training and operational productivity improvement.

To order the books, “Cracking the Personality Code” and “Cracking the Business Code” please go to www.lighthouseconsulting.com.

Paying for Sales Results

By Karen Jorgensen

Sales is the easiest part of the business model to incentivize. Despite this apparent ease or maybe because of it, it doesn’t take much experience to see that sales is the business function that most decision makers incentivize poorly.

The dynamics of sales continue to change even faster than changing times. With a global economy, technological advances, business expansions and mergers, the sales function is constantly adapting to new ways of operation. Cell phones, point of sales computers and telemarketing improve the sales effort and require new ways of doing business.

The sales function does not operate as independently as in the past. In fact, the sales function must work in close relationship with customer service, market research, engineering and advertising. A good salesperson knows how to expedite products and has important relationships with the company.

Client/Customer relationships have become key to the sales function. The emphasis in many businesses has shifted to a relationship sell. The sales person must nurture relationships with existing customers who aren’t ordering at the same time he or she is working with the customers who are ordering.

How Do You Compensate Sales Performance?

Clearly stated objectives are critical to developing sales team compensation. Do you want the compensation plan to encourage increased volume, specific products, profitability, new business, relationships or retention? The objectives of a sales plan should change at least yearly based on market opportunities, competition, new products and technology. Prior to developing any sales team incentives, the objectives must be clearly identified and agreed upon by all key executives.

Pay philosophy must take into account the technical know-how of the sales personnel, as well as the difficulty of the sale, training and risk of the business. A small business or a start-up is going to be riskier for a salesperson. An unknown product from a new company is harder to sell.

Smaller companies with less established products tend to pay sales personnel higher base salaries. Bigger, more established firms have lower base pay. The lower pay of big companies is offset by training, benefits, promotional opportunities, a known product and service, and more perks.

Pay philosophy also must establish who is the sales team. What is the role of marketing, customer service, advertising or installation in the sales process? Are there non-sales functions that require time from the sales team, such as maintaining relationships, servicing accounts or providing technical information?

Individual sales goals create competition, not cooperation. A company needs to evaluate how much reward or incentive should be tied to the total team. The trend in most industries is toward more team-related sales incentives.

Simple Sales Goals

Competitive pay practices are an important factor in setting sales compensation. Researching what is happening in the industry, the expected average profits of other companies and predicted sales growth is very important.

In designing sales incentives, sales personnel input can be very valuable. Discussing goals and expectations with sales personnel also can help overcome their resistance to change. Of all types of work teams, the sales function understands reward processes the best. These team members usually have excellent input into what needs to change, how measurements can be improved and what team expectations need to be rewarded.

A sales incentive questionnaire can be used to gather information from the sales force. This can be done one-on-one or in a focus group. All members of the sales team should participate.

When rolling out a new sales plan, we recommend the new plan be designed to be more lucrative if goals are met than the old plan. We also feel that if you obtain sales input during the research phase, the actual rollout and acceptance of the plan will be easier.

JorgensenHR is a BestPRACTICES human resource solutions firm that helps clients create additional value in their business or organization through well-designed, customized human resources management solutions. These include our BestHRSolutions products and services for HR outsourcing, training, affirmative action, investigations, policies, compensation, recruitment, HR assessments, and We Want to Know Hotline. For more information, please contact Linda Harris at (661)600-2070, email her at lharris@jorgensenhr.com or visit the company website, http://jorgensenhr.com/

Inspiration and Techniques for Building Championship-Level Performance – Lighthouse clients have one thing in common – all are committed to boosting the performance of their organizations. So, we are pleased to introduce our clients and friends to Boaz Rauchwerger — speaker, trainer, author and consultant. We highly recommend Boaz to you. Ask him to deliver one of his inspirational programs at your next executive retreat or strategic planning session.

One of our favorite Boaz programs is “Playing Like a Championship Team Every Day”. It helps you build on the strengths of everyone’s individual differences. This program helps you discover five steps to get everyone to join the building crew and resign from the wrecking crew. This is a very powerful and inspirational program that receives rave reviews every time.

• Master five techniques to inspire others to perform like champions
• Six recognition techniques including the powerful “good finder” program
• Learn four ways that your team can gain a competitive advantage
• Identify the three prerequisites for maximizing the team’s results
• Learn the two forms of keeping a daily score so everyone wins

Who is Boaz? Over a 30-year span, Boaz, author of The Tiberias Transformation – How To Change Your Life In Less Than 8 Minutes A Day, has conducted thousands of seminars internationally on goal setting and high achievement. He has taught over half a million people how to supercharge their lives, their careers and how to add Power to their goals. His innovative program, for individuals and corporations, is a simple and highly effective process for high achievement. He was voted Speaker of the Year by Vistage, an international organization of CEOs and business owners. How to Contact Boaz – Want more information on Boaz’s Power Program, including “Playing Like a Championship Team Every Day”? Just click here and we’ll be in touch.

If you would like additional information on this topic or others, please contact your Human Resources department or Lighthouse Consulting Services LLC, 3130 Wilshire Blvd., Suite 550, Santa Monica, CA 90403, (310) 453-6556, dana@lighthouseconsulting.com & our website: www.lighthouseconsulting.com.

Lighthouse Consulting Services, LLC provides a variety of services, including in-depth work style assessments for new hires & staff development, team building, interpersonal & communication training, career guidance & transition, conflict management, 360s, workshops, and executive & employee coaching. Other areas of expertise: Executive on boarding for success, leadership training for the 21st century, exploring global options for expanding your business, sales and customer service training and operational productivity improvement.

To order the books, “Cracking the Personality Code” and “Cracking the Business Code” please go to www.lighthouseconsulting.com.

Is Your Performance Appraisal Program Motivating?

By Allison Pratt

[dropcaps type=”circle” color=”” background=””]A[/dropcaps] supervisor was the subject of many complaints from his employees. “I don’t know where I stand with him”, “I had no idea he was unhappy with my performance until my review”, “I never know what he wants or expects” were comments the department manager and human resources heard on a regular basis. His own employees were afraid to go directly to him. Finally, the issue was identified. This supervisor was effective in most of his responsibilities, but he did not know how to effectively coach his employee’s performance. Identifying this missing skill and providing this supervisor with specific training turned his employee’s concerns around and reduced turnover for his group. In fact, he now has other employees seeking to transfer to his department!

One of the toughest challenges and most avoided responsibilities of the manager is providing performance feedback to the employee. Many managers will put off this important discussion, or gloss over real performance concerns. Especially difficult is dealing with the employee whose performance is substandard. Not having an effective performance management process in place, and managers who are not trained to conduct a performance appraisal can lead to morale problems and potentially even leave your company open to legal problems; claims of discrimination and harassment.

Some of the obstacles to a successful appraisal process include the lack of skills or awareness of the supervisor. Avoiding conflict is human nature and there is a tendency to avoid tough performance confrontations or to have an emotional, ineffective discussion when performance is addressed. Fortunately, there are steps you can take to mitigate your risk.

Tips for Legal Compliance

• Performance ratings must be job-related, with measurable and quantitative performance standards. Evaluations must be based on job responsibilities and a measurable standard must exist to compare employee behavior.
• Employees must be given a written copy of their job standards in advance of appraisals. The courts have looked favorably on companies who clearly provide employees with this information and unfavorably on those companies who did not.
• Managers who conduct the appraisal must be able to observe the behavior they are rating. A manager who works in another location from their subordinate must be careful to use facts vs. hearsay when conducting an evaluation. Phone calls and email exchanges can be considered observable behavior.
• An appeals procedure should be established to enable employees to express disagreement with the appraisal. This is a critical and often overlooked step. All employees need to be provided with a mechanism to voice their view of the appraisal process. Employees should be encouraged to provide a written rebuttal which is placed in the employee file along with the original review.
• Training is key. Supervisors should be trained to use the appraisal form correctly.
Supervisors should be trained to conduct the appraisal discussion correctly. This type of training is time well-spent as the success of the process begins and ends with the supervisor.

Why Performance Appraisal Systems Are Not Effective

There are many reasons why performance appraisals fail or falter. Do you see any of these symptoms in your company?

• Inadequate preparation on the part of the manager
• Employee not given clear objectives at beginning of performance period
• Manager may not be able to observe performance or have all the information
• Performance standards may not be clear
• Inconsistency in ratings among supervisors or other raters
• Rating personality vs. performance
• The halo effect, contrast effect or some other perceptual bias
• Inappropriate time span (either too short or too long) of evaluation
• Overemphasis on uncharacteristic performance
• Inflated ratings because managers do not want to deal with “bad news”
• Subjective or vague language in written appraisals
• Organizational politics or personal relationships cloud judgments
• Manager may not be trained at evaluation or giving feedback
• No follow up and coaching after the evaluation

Supervisor’s 3-Step Checklist for the Performance Appraisal

This checklist can be very helpful for the supervisor preparing and delivering the performance appraisal.

1. Scheduling:

• Schedule the review in advance
• Ask the employee to prepare for the session by reviewing their performance, job objectives and development goals.
• Clearly state that this meeting will be the formal annual performance appraisal

2. Preparing for the Review:

• Review the performance documentation collected throughout the year.
• Concentrate on work patterns that have developed vs. isolated incidents.
• Be prepared to give specific examples of above or below average performance
• When performance falls short of expectations, determine what changes need to be made. If performance meets or exceeds expectations, discuss this and plan how to reinforce it.
• After the appraisal is written, set it aside for a few days and review it again. Make revisions.
• Follow whatever steps are required by your organization’s performance appraisal system.

3. Conducting the Review:

• Select a private location that is comfortable and free of distractions.
• Discuss each topic in the appraisal one at a time, considering both strengths and shortcomings.
• Be specific and descriptive, not general and judgmental. Report occurrences rather than evaluating them.
• Discuss your differences and resolve them. Solicit agreement and understanding of the evaluation.
• Jointly discuss and design plans for taking corrective action for growth and development.
• Maintain a professional and supportive approach to the appraisal discussion.

Additional Tips for the Manager

• Keep feedback balanced with positive and negative observations
• Listen to employees
• Don’t focus solely on negatives
• Be objective
• Have solutions to problems
• Use tact and diplomacy
• Listen before responding

Tips for the Employee

Employees also have a role in the successful performance appraisal. Most people consider the appraisal to be the 100% responsibility of the manager. However, the employee receiving the review must prepare themselves and be in the right mindset to have the most effective discussion. Here are some tips to accomplish that goal:

• Be open and receptive
• Be honest
• Create solutions
• Try to understand your manager’s perspective
• Don’t argue
• Don’t hold back/speak your mind
• Don’t be defensive
• Prepare in advance
• Listen before responding

So, with a bit of training and awareness, this challenging and important process can be much more effective for your organization. Please feel free to use these tips as guidelines for your company. Having appropriate forms and checklists can be very helpful for the supervisor and also in helping the staff member to prepare for the appraisal meeting. If you’d like a free Performance Appraisal form or a Supervisor Performance Appraisal Checklist, please email Allison Pratt at allisonjpratt@gmail.com.

Allison Pratt owns Pratt & Associates, a Human Resources consulting Company and has been a Human Resources professional with over thirty years of experience in all aspects of human resources management. Her experience is varied and includes corporate, consulting and academic perspectives and has provided a wide-range of clients with strong human resources support. Allison also teaches at the graduate and undergraduate levels for six local colleges and universities. Her specialties: HR Generalist services including areas such as mediation and conflict resolution, pre- and post-termination advice, harassment investigations and training, creating employee handbooks, performance management and supervisory coaching and training. For more information, please contact Allison Pratt at 949-588-8385 and allisonjpratt@gmail.com.

If you would like additional information on this topic or others, please contact your Human Resources department or Lighthouse Consulting Services LLC, 3130 Wilshire Blvd., Suite 550, Santa Monica, CA 90403, (310) 453-6556, dana@lighthouseconsulting.com & our website: www.lighthouseconsulting.com.

Lighthouse Consulting Services, LLC provides a variety of services, including in-depth work style assessments for new hires & staff development, team building, interpersonal & communication training, career guidance & transition, conflict management, 360s, workshops, and executive & employee coaching. Other areas of expertise: Executive on boarding for success, leadership training for the 21st century, exploring global options for expanding your business, sales and customer service training and operational productivity improvement.

To order the books, “Cracking the Personality Code” & “Cracking the Business Code” please go to www.lighthouseconsulting.com.

Sharing Savings from Improvements

By Ravi Patel

[dropcaps type=”circle” color=”” background=””]E[/dropcaps]xperience has shown that involving employees in coming up with improvements; empowering them to implement the enhancements; monitoring the results; and sharing in the rewards is a blueprint for success.

• Do you believe in continuous improvement?
• Are you interested in reducing costs, improving productivity or increasing savings in your business processes?
• Could your employees have ideas for improvement or cost reduction?
• Do you encourage employees to suggest improvements?
• Would you like your employees to be more aligned with your company and other team members?

Most often, employees are closest to the business processes that they are working on; thus, they are in a great position to notice issues and recommend and implement improvements. If they are asked, employees can get involved and make significant contributions to improving the bottom line of their company. Most employees like to be a part of a team and work together to contribute to group results.

Entrepreneurs would be best served to implement some form of a continuous improvement program in their companies and have a culture of “Doing Things Better”.

A manufacturing company supplying high-tech products to the aerospace industry had embraced the concept of TQM (Total Quality Management) and Continuous Improvement using world class manufacturing techniques. The basic principles call for completely understanding and documenting key operational processes; developing key performance metrics; finding ways to improve performance on these metrics; measuring and widely sharing actual results after implementation; and continually repeating the improvement and measurement process.

The company established teams of employees for each key process and held them responsible for continuous improvement. The teams met one hour each week to review and discuss the metrics for the previous week and brainstorm improvement ideas. The progress was shared with other employees once a month. Specific ideas for implementation were presented to the management team for review and final approval.

In order for the program to continually provide improvements throughout the company, Entrepreneurs should devise a system to share the rewards from improvements. The rewards in such Shared Savings plans should be meaningful and definitely motivational.

The manufacturing company established a reward system based on the savings resulting from the implemented ideas. For every new idea that was implemented by the team, each member received a fixed dollar amount in the very next paycheck. This provided an instant gratification system for coming up with and implementing new ideas.

For each idea that had the potential to generate savings or increase productivity, an objective measurement metric was developed in conjunction with the finance team. The actual savings or other benefits were monitored on a quarterly basis and the team members responsible for that idea were given 25% of such amount as a shared reward in their paychecks for up to one year. Additional incentives such as group activities, such as trips and dinners were offered depending upon the scope of the savings.

Companies might even have group programs to improve general operational issues with ultimate cost savings.

A manufacturing company used a group program using continuous improvements techniques to improve the safety in their operations. The safety committee reviewed past accidents for common causes and developed procedures to mitigate such incidents. In addition to developing accident-free metrics, they appointed teams in different areas to monitor safety practices and suggest improvements.

The company and the safety committee established the total cost of each lost workday for different areas in the company and set aside a monetary pool for potential rewards. Based on improving the accident-free metrics over the previous benchmarks, the company paid out each quarter an incentive payment proportional to the number of accident-free days for the specific area of operations.

While such Shared Savings plans or programs have many names, the basic elements are quite similar. This list is by no means complete but offers suggestions.

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In addition to the actual monetary benefits, Shared Savings plans continually reinforce behaviors that promote improved performance. They are used as a tool to drive cultural and organizational change. Such programs heighten the level of employee awareness, help develop the feeling of self-worth, and build a sense of ownership and identity to the team and the organization.

Factors important to designing and maintaining a successful Shared Savings plan include:

• Utilize clearly communicated objectives for the company and the plan.
• Employees should feel like they have ownership and control in the process of designing, implementing, and monitoring the plan.
• Measurement formulas should be easy to understand and performance directly controlled by the employees.
• Rewards should be tied directly to performance and payouts should be as close to the achievement of results.
• Management should be fully committed to the established plan.

A downside associated with these types of Shared Savings plans or programs is that there might be payouts for these plans while the company as a whole might not be making money. High performing individuals may be frustrated as they have to share team rewards with lighter performers. Management should avoid the temptation to change benchmarks just because improvements and payouts increase.

Finally, a thought from Dana Borowka, CEO of Lighthouse Consulting Services, LLC (www.lighthouseconsulting.com) and author of Cracking the Personality Code, that hiring the right people is key to future growth. If you would like additional information on raising the hiring bar, please click here to see an article on this subject.

Ravi Patel is President and CEO of Patel CFO Services that provides outsourced CFO services for Entrepreneurs and can be reached at ravi.patel@patelCFOservices.com

If you would like additional information on this topic or others, please contact your Human Resources department or Lighthouse Consulting Services LLC, 3130 Wilshire Blvd., Suite 550, Santa Monica, CA 90403, (310) 453-6556, dana@lighthouseconsulting.com & our website: www.lighthouseconsulting.com

Lighthouse Consulting Services, LLC provides a variety of services, including in-depth work style assessments for new hires & staff development, team building, interpersonal & communication training, career guidance & transition, conflict management, 360s, workshops, and executive & employee coaching. Other areas of expertise: Executive on boarding for success, leadership training for the 21st century, exploring global options for expanding your business, sales and customer service training and operational productivity improvement.

To order the books, “Cracking the Personality Code” and “Cracking the Business Code” please go to www.lighthouseconsulting.com.

The Key To Using Performance Incentives

By Marc Emmer

[dropcaps type=”circle” color=”” background=””]T[/dropcaps]he “Great Recession” was unlike any other downturn within our experience. Its effects were deep and sudden; many organizations have felt as if they had fallen off a cliff.

One key lesson of the downturn and the giant sucking sound that followed was that businesses must be prepared for the ebbs and flows of demand, and must minimize fixed costs. Pre-recession, many companies faced rising labor costs as a result of spiraling workers compensation insurance and health care rates.

Many entrepreneurial companies utilize informal, subjective incentive plans with very high proportion of cash compensation paid out in salaries. The result is that labor costs are somewhat fixed and not married to revenue or demand. The only way for companies to cut their labor expense (when they are fixed) is to lay off workers.

While almost every Fortune 500 company employs some sort of pay-for-performance system, adoption is slower in entrepreneurial environments. Thus pay-for-performance is emerging as an important opportunity for small and mid-market companies seeking to control their profitability.

The efficacy of pay-for-performance from a motivation standpoint has been subject to vigorous debate. Yet the broader implication for companies is undeniable: pay-for-performance allows an organization to align its organizational priorities and financial performance, with the compensation it pays to its employees.

Within my experience, there are three things best-in-class companies do well:

• They have a clear vision of the future (strategy)
• They convert the strategy into operational terms
• They bring their employees along for the ride

An effective scorecarding system can be the conduit between strategy and creating a management system that drives the individual performance of employees. Only once the success factors within a company and the resulting scorecard measures are identified, can an effective pay for performance system be employed.

Pay-for-performance is highly controversial and making changes to compensation systems tend to be hotly debated. I always say pay-for-performance is a lot like capitalism, it is imperfect, but it is still the best system I know. Clearly, financial incentives work best when married with other forms of motivation (such as positive reinforcement). Incentives will only change behavior when they provide an adequate proportion of compensation (20% or more). Companies that are very good at performance management use incentives as part of a performance cycle where goals are set with employees (based on the underlying strategy), and their performance is managed through the course of the year (or whatever cycle is used). Incentives are only the culmination of much discussion about how an employee increases his or her productivity and skill sets.

Pay-for-performance can take on many forms. Within our firm, we advocate for a multi-bucketed design of such plans as follows:

Bucket 1 – The financial performance of the organization
Bucket 2 – Scorecard results (numbers shared by a department or across functional departments)
Bucket 3 – Individual contributions from the employee

Organizations utilize different buckets and weighting based on a number of variables, but financial results are often heavily weighted (as high as 50%). The bucketed approach provides a balanced solution to the most compelling problems with incentive plans.

When companies pay subjective bonuses, they create an entitlement, and expose themselves to legal liability (discrimination, wage and hour, etc.). Subjective bonuses often generate two undesirable outcomes. In some cases a company performs well but individual employees do not. When equal bonuses are handed out to employees, bonuses can reinforce poor performance. The reverse is also true. When an employee performs well and their company does not, if they receive no bonus, they are de-incented. Thus the bucketed system provides the most equitable of outcomes; most strong performers will earn some bonus when business is good and a lessor pay out when business is poor.

To launch a pay-for-performance plan requires effort and timing. Most companies establish a bonus pool to be distributed only after some minimum level of profit is realized. If an organization has historically paid out subjective bonuses, the roll out of a plan causes some distress. There are always employees who will fight the use of incentives. As a general rule, good performers like performance measurement, and poor performers do not. Deploying such a system requires significant managerial courage and discipline.

As rolling back salaries is implausible, one approach is to freeze salaries in a given year and incrementally increase the richness of a bonus pool until it reaches a level of contribution that is meaningful (this could take 3-5 years if you are starting from scratch). Over time, an organization can shift from a lack of accountability to one in which goal setting is expected, and the incentive plan is part of the DNA of the company. It is strongly recommended that companies adopt a scorecard first, and gain momentum around measurement before moving to pay-for-performance. When employees become aware that their contributions will be measured through numbers, they can become highly territorial about which numbers are used, which can defeat the process.

There has never been a better time to deploy a scorecard and pay-for-performance system. As employees have had to absorb pay cuts and lay offs, they have a greater sensitivity to the requirement that their organizations sustain a profit. Leveraging labor efficiently and marrying it to corporate performance has become a strategic imperative.

Finally, a thought from Dana Borowka, CEO of Lighthouse Consulting Services, LLC (www.lighthouseconsulting.com) and author of Cracking the Personality Code, that hiring the right people is key to future growth. If you would like additional information on raising the hiring bar, please click here to see an article on this subject:

Resources on this topic: Intended Consequences by Marc Emmer, The Compensation Handbook by Lance Berger

Marc Emmer is a speaker, author and consultant, recognized throughout North America as an expert in strategic planning and performance improvement. Marc is President of Optimize Inc. a management consulting firm specializing in strategic planning. Marc can be reached at 661-296-2568 or at marc@optimizeinc.net.

If you would like additional information on this topic or others, please contact your Human Resources department or Lighthouse Consulting Services LLC, 3130 Wilshire Blvd., Suite 550, Santa Monica, CA 90403, (310) 453-6556, dana@lighthouseconsulting.com & our website: www.lighthouseconsulting.com.

Lighthouse Consulting Services, LLC provides a variety of services, including in-depth work style assessments for new hires & staff development, team building, interpersonal & communication training, career guidance & transition, conflict management, 360s, workshops, and executive & employee coaching. Other areas of expertise: Executive on boarding for success, leadership training for the 21st century, exploring global options for expanding your business, sales and customer service training and operational productivity improvement.

To order the books, “Cracking the Personality Code” and “Cracking the Business Code” please go to www.lighthouseconsulting.com.