Incentives for profit

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Your employees and colleagues make decisions every day that affect your company’s bottom line. Without standing over them constantly, how do you get them to do what they should do?

There is no simple answer. What works in one situation or company almost certainly won’t work in another. Regardless, owners and managers are beginning to realize that what you expect, reward and encourage somehow gets done. If you pay by the hour, employees seem to put in lots of hours – but you don’t necessarily get good performance. If you pay dispatchers to keep trucks loaded, you’ll have full trucks – but not necessarily profitable freight.

Establishing a successful incentive program, therefore, is as much about pinpointing the specific results you want to achieve as it is about determining what package will achieve them. If you want to try to tie pay to performance, however, consider the following advice:

Take your time. There are entire books and, indeed, organizations devoted to the study of incentive compensation. Implementing a hastily considered plan for just a portion of your labor force – dispatchers, for example – almost certainly will cause new problems for you.

Balance company goals with individual goals. First understand clearly what you want the company to accomplish overall. Then work backward to divide up the goals for the individual managers or departments.

Beware of incentives or rewards that can benefit an individual without benefiting the company. An incentive based on gross sales, for example, might encourage everyone to keep trucks full with any freight they can get. That’s great for sales commissions, but it could wreck your freight network and profitability. Likewise, it’s important that all employees have the opportunity to participate in the incentive plan. Don’t let poor morale among drivers, for example, undo all your progress with dispatchers.

Balance short-term and long-term performance. Business is a marathon, not a 100-yard dash. Larger companies combine a quarterly profit-sharing plan with a stock-option plan. The first helps people see the benefit of their good work more immediately, encouraging short-term profits. The second helps people see the long run – things that must be done to build the overall value of the company. You can’t let short-term gains destroy the foundations of long-term prosperity.

There is no “perfect” plan; yours will have tradeoffs. The more you work with these ideas, the more you’ll be tempted to throw up your hands, because someone will inevitably point out why it will not work. Veterans of these plans know that there is a balance of tension created between conflicting objectives, and no one plan will satisfy everyone.

Try to project the results. Once you have a plan you think will work, try to determine how the plan will affect your bottom line. Using a full year’s worth of actual numbers, improve your numbers in the areas that you think you are encouraging better performance and recompute your financials. You might be surprised by the results.

Consider team or group rewards. Employee participation and buy-in is critical. Successful plans are designed so that employees do not feel manipulated toward some end. Instead, they see the plans as a way to keep score on how they are doing in achieving shared goals.

If you reach that powerful level of employee participation, you better get out of the way – you will not be able to stop the profits from coming.

Resources: Incentive Compensation and Employee Ownership Third Edition, Edited by Scott S. Rodrick and published by The National Center for Employee Ownership (www.nceo.org).

Kenneth Dewitt is a CPA and certified financial planner who serves as a part-time chief financial officer for a variety of businesses, including trucking companies. E-mail kdewitt@eTrucker.com.