What’s wrong with incentive compensation?

Nov 02, 2009

As the year starts to wrap up, most A/E and environmental firms begin to rethink their incentive compensation plans: “Is our plan right for our company?”; “Does it reward the behavior we want to reward?”; “Is what we do fair?” These are all good questions. But, there may be even more fundamental questions that need to be asked and answered. Some of these include: Why should we have an incentive compensation plan of any kind? I think this is a darn good question. The reasons usually center around rewarding people for outstanding performance. But, the problem comes in when the incentive becomes expected, or when the performance of any one individual is extremely difficult to determine. The other problem is that of individuals not seeing how they are performing. If there isn’t complete transparency and the financial data isn’t shared with everyone, why pay anything out as an “incentive?” It’s an incentive to do what? If the purpose of our plan is to motivate people to higher levels of performance, shouldn’t we consider employing other motivational tactics? Yes. I think you should. Salary increases— on a more frequent basis— are one thing to consider. Another is more interesting work assignments and training opportunities. Take people to meetings or on trips they may not normally go out on. The other thing is open book management. Share the numbers on how the firm and all of its pieces are performing with everyone there. What do we do that demotivates people? The biggest demotivators of design professionals are things such as unnecessary meetings, toleration of poor performance, and poor supervisory practices of the individual’s immediate boss. Working to eliminate demotivators is every bit as important (and perhaps even more fruitful) than implementing the typical A/E/P or environmental firm incentive compensation plan. Do we have the necessary mechanisms in place to reform or remove poor performers? Most companies in this business do not. We try to use our incentive comp plans to “run off” poor performers because our managers don’t have the guts to do it themselves. This is not a good way to run a business— any business! Assuming we do have an incentive plan, how frequently should we pay out rewards? Probably more frequently than you are at present. I never understand why everyone seems to think that incentive plans should pay out annually, or maybe twice a year. Monthly is better! Why not get everyone trying to make the firm successful every month and benefiting from it immediately if so? The farther away the payout is from the activities that created it, the less of a connection there is between pay and performance. Originally published 11/02/2009

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