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Overcome Your Inner Grinch: Open your books and try incentive compensation. The results will pay dividends.
Leader's Edge, December 2008
Fast Focus
- An incentive compensation program can rejuvenate a company.
- Not just for salespeople and top execs, incentive compensation works best when delivered democratically.
When you hand out holiday gifts, do they go only to one segment of your
employee population? How about your health plan or other benefits—are
they doled out to a select few? To be truly effective, employee benefits
like a healthcare program or retirement plan must be offered to all
workers. Sure, the details may differ by job rank and longevity, but if
a visible benefit or perk is withheld from some segment of your
population, you are asking for strife in the ranks, and all the Whos in
Whoville will see you as the Grinch.
So it is with incentive compensation. You may want to try this or think
you're already doing it, but most likely it's extended to just one
segment of your workforce. If so, you're not only putting coal in the
stockings of your other workers, but you're Scrooging yourself out of a
potential windfall of benefits. This month, as many people end the year
reflecting on and celebrating achievements, I want you to look ahead to
see what companywide gift you might share with staff.
Offering an incentive compensation program could be the most valuable
package you wrap up for your company this year, and to truly be received
in the spirit of the season, it must be democratically delivered. The
benefits will not just land in the stockings of the employees, however;
this is truly a gift that will keep giving to agency owners and everyone
around them. The positive payback to your business and the functioning
of the company will be abundant.
Results-Driven Comp
What used to be primarily a strategy for large, publicly held companies
is now attracting the interest of smaller and privately held firms. I
think the shift has come because it is understood that tying
compensation directly to employee performance will help drive business
results.
In the insurance agency world, however, it still amazes me that many
executives fail to recognize the correlation between incentive pay and
agency performance. Perhaps some agency owners theoretically buy into
the concept but don't know how to implement it. Also, I suspect that
many executives think they're already doing it. "Our producers are on
commission," they'll say, "so the better they do, the more money they
make and the better the company will do." That's fine, as far as it
goes, but I have a holiday news flash: Incentive compensation is not
just for salespeople.
Spotting the Correlation
I expect that many people do not fully realize or cannot make the
correlation between compensation and performance. It's a concept often
used in entrepreneurial businesses but not so readily adopted by more
established, old-line firms. In a way, however, this is a method of
rejuvenating your company and reinvigorating a staid, old culture.
Think about this: Companies that have successfully transitioned from a
standard compensation plan to pay-for-performance have found that such a
culture will also help employees achieve their full potential. In such a
people-focused business as ours, what could be more important? The
system can serve as an incredible recruitment tool and help with
retention because top talent remains motivated. All the while, it is
also working to improve bottom-line results.
Alignment with Objectives
When proposing business tactics or systems, proponents will discuss
"alignment" as a key element of success. What does alignment really
mean? In a pay-for-performance plan, it's relatively simple:
Compensation is tied directly to company goals and objectives, and
employees share a true win-win culture as people are rewarded
significantly for achieving key company goals.
In previous articles regarding organizational structure and
compensation, I have discussed key concepts that effectively utilize
such compensation by directly tying company culture to goals and
objectives. Here are four ways to measure the effectiveness of a plan:
- Achievement of new business goals
- Agency retention rate
- Total agency commission revenue
- Client satisfaction surveys.
If incentive compensation can be tied to metrics that are tracked and
consistently shared with your team, they will get the picture and have
incentives to ramp up their production.
It is a mystery to me why so few agencies tie compensation to
measurements such as these. However, I do have one clue. I've found that
many agency owners are afraid to share financial details with staff or
simply don't want to. Well, that attitude is as silly as stealing an
entire town's Christmas presents, and it will doom any efforts toward an
incentive compensation plan as surely as trying to pull your sleigh with
a beagle.
For pay-for-performance to work, tracking or monitoring measures must be
linked to regular, top-to-bottom communication about the progress toward
desired results. Otherwise, if you'll recall your Grinch, you're doomed
to teeter on the precipice of a great fall. Here endeth the analogy.
What's In It For You
To sway those who want to keep their financials close to the vest, I
often will tick off some of the many benefits that can accrue from
instituting incentive compensation and opening the books so everyone can
see how the company's doing. The results include alignment with agency
goals and objectives, better motivation and morale, improved recruiting
capabilities and overall firm cost savings. Let's take a look at each of
those perceived benefits.
Goal Alignment. There's an effect on three key areas:
- Productivity. This is the result of focus and cohesiveness. If
your entire team understands agency goals and objectives and can link
that to their own goals, they will become more productive.
- Teamwork. A common bond develops between people who have shared
goals, and individual incentive to stay engaged is boosted by the carrot
of compensation.
- Communication. Management will be on a continual
process-improvement curve with communications because it will become
essential to the firm's success. It must continually update employees on
their progress and the company's metrics, and leadership must provide
insight or feedback as to what must be done to keep performance on
track.
Morale. Increased motivation comes from this shared purpose and a
transparent look inside the process. In my experience, a well structured
compensation plan brings out the best in employees, and the company
benefits from that positive vibe. If managers can get their staff to
perform at maximum capacity, that will filter throughout the
organization and improve the performance of all employees. I define this
as a culture-driven improvement rather than a process-driven one. It is
an environment where people perform to achieve company goals because
they realize they will greatly benefit as well.
Recruiting and retention. Every agency owner I know regularly complains
about the difficulty in recruiting talent. The problem spans the agency,
from account executives to account managers, producers to CSRs. The
presence of a well designed performance plan will greatly aid in
recruitment, and it will positively affect retention. The plan becomes a
competitive advantage. Why can companies like Microsoft and Google
recruit thousands of people every month? It is partially due to their
compensation plans.
Cost savings. When I talk about cost savings, I'm not referring to cost
cutting. The savings go much deeper than cuts would. Properly aligning
goals and objectives with pay will set accountability. Also, developing
reward systems ultimately weeds out those employees who do not buy into
the company's culture and end up costing the company thousands of
dollars. What's left is a leaner organization, and having everyone
focused on the bottom line is much more effective than having your
managers combing the budgets for cuts and savings.
Developing Your Plan
It's not possible for me to outline a plan for your firm because one
size does not fit all and you must create a plan that fits your
individual agency's needs. Also, integration will be the key, and how
well a firm does that varies greatly. Let's talk about each of these in
detail.
Rightsizing. Your firm is unique—markets, positioning, team structure
and management tree. Sure, all agencies have some key attributes, and
one of those is that insurance agencies are people businesses. The
industry operates on people and their relationships. Therefore, whenever
I'm discussing a way to tailor an incentive compensation plan, I start
with three questions:
- Is your current compensation plan driving the desired activities?
- Is your plan delivering the results your agency is looking to achieve?
- Are people reaching the goals and objectives you set for them?
If you thoroughly consider these questions, you'll be formulating answers to other key pieces of information, such as your desired activities, agency results, and personnel goals and objectives.
As you grapple with these questions, consider these issues:
- Are your employees (or at least key employees) willing to take on more accountability for higher pay?
- Do they have the skills and capabilities necessary to succeed?
- Have you implemented the monitoring and reward systems up front so that people can truly measure the correlation between performance and pay?
In the end, to be successful, you have to craft an incentive plan that
is unique and specific to your agency, your people and your desired
outcomes.
Integration. It's not possible to develop an incentive compensation plan
in a silo. It must be part and parcel of your strategic plan and
operations. In short, it must be integrated with other components of
your business.
Here are three key elements that must be properly developed for
integration to have any chance of working:
- Planning: You must be clear about how incentive compensation ties
into your overall compensation package of salaries, commissions,
benefits and perks. It's not enough just to layer incentives on top of
the existing mix. For most people, the motivation will be greater if
they can see incentives as integral to their entire package.
Creating and, yes, selling the entire package to employees is an area
where many agencies fall down. They do not clearly define and integrate
performance and reward, so employees do not see the big picture. With a
well structured and well communicated plan, an employee will be able to
calculate incentive pay based on "what if" performance at any time.
Employees must also realize that performance pay is variable and based
on the agency's achieving set goals. This is where the incentive pay
departs from the rest of the package; it is outside of other bonuses,
merit increases or cost-of-living raises. The review process is
different, too; it's not just a matter of filling out a form but rather
will hinge on key metrics that align goals and objectives with the
agency's performance.
- Alignment: Integration can work only if the essentials of
business management are followed and properly aligned with the incentive
pay program. A direction statement must be set, and it must lay out the
mission, vision, goals and objectives of your operation. Then, those
items must be properly communicated to everyone on the team so that
everyone—from receptionist to senior management—knows and understands
the agency's goals and objectives. Once these are in place and well
understood, the final part of your integration plan can be put into
place, which brings me to…
- Performance management: There's an old truism that "what is
measured gets done." I would add this corollary: "What is managed gets
measured." In simple terms, performance management is the ability to
continually measure performance in an easy-to-understand, quantifiable
way. It must be well thought out, not arbitrary. It must be well
communicated.
At the heart of this process is proper management. Discard the thought
of annual performance reviews, and think instead of weekly, monthly and
quarterly. More importantly, consider how you will implement a robust
communications system so that employees can measure the performance
management system. As any successful leader will tell you, pay for
performance requires planning, discipline and flexibility, just like any
key strategic initiative.
To become a true results-driven agency, pay-for-performance or incentive
compensation is critical to success. Ultimately, it will become part of
your agency culture. If it's successful, incentive compensation will
result in a more energized and engaged workforce full of people who
understand not only their roles and responsibilities but how each
person's role is key to driving agency success.
While keeping that big picture in mind as an overall goal, realize also
that you must pay attention to detail, structuring the plan in a
transparent, objective way, and then implementing it with proper
communication and feedback mechanisms. Remember not to be a Grinch and
hoard agency financial data or seek to hold down costs by skimping like
Scrooge on development and implementation of this important strategic
tool. These are the gifts for your employees this year, and they will
pay dividends in the coming months.
If you are successful in developing your incentive compensation plan, I
guarantee that you will improve your financial results and, in the end,
enhance shareholder value, which should be the ultimate holiday gift you
can give yourself.
Rob Lieblein is a contributing writer and managing partner of Hales & Co. Rob.Lieblein@LeadersEdgeMagazine.com
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