Klemm & Associates

• Executive Management Series

• Building Incentive Plans in Your Company

• Andy Klemm

Klemm's Quick Guides for Incentives

• As Much Art as Science

• Follow a Process not a program

• 7.5% to 15% Minimum

• Ideally 3 Goals, but 2 to 4 Maybe OK

• One Page for Individuals

• Fix Right Away

Overview of the Session–1 of 1

• Incentive Theory• Range of Practices• The Case Against Incentives• Feasibility Study Process• Plan Design• Implementation and Monitoring• Team Exercise• Final Thoughts

Compensation Objectives–1 of 1

• Further Strategic Intent

• Attract and Retain Qualified Employees

• Increase Employee Ownership

• Provide Motivation

• Reward Individual Performance

• Reward Group Performance

Theory–1 of 15–Objectives–1 of 3

• Compensation & Incentive Objectives–1 of 3 – Further Strategic Intent – Reinforce Values – Communicate Goals and Objectives – Create Common Understanding of Goals

Theory–2 of 15–Objectives–2 of 3

• Compensation & Incentive Objectives–2 of 3 – Attract and Retain Qualified Employees – Increase Employee Ownership

• Actual–via Stock • Theoretical–via Belief in Vision and Goals

– Increase Job Satisfaction

Theory–3 of 15–Objectives–3 of 3

• Compensation & Incentive Objectives–3 of 3 – Make Performance Standards Clear – Provide Motivation – Get Employees to Produce Results – Modify Behavior – Influence, Encourage, or Spur Action – Reward Performance

Theory–4 of 15–Motivation–Abraham Maslow 1954–

Motivation and Personality

• Hierarchy of Needs

• Basic (Food Clothing, Shelter, Health)

• Social (Membership and Friendship)

• Ego (Self-Esteem and Recognition)

• Self-Actualization (Growth & Service)

Theory–5 of 15–Motivation–Douglas McGregor 1960–The Human Side of

Enterprise • Theory X

– You're Bad–the Only Way I Can Control You is Through Economic Rewards

• Theory Y – Capacity for Imagination, Ingenuity, and

Creativity is Widely Distributed in the Work Force

• Linked With Joseph Scanlon (1940's) • Industrial Relations Department at MIT

Theory–6 of 15–Motivation–Rensis Likert 1961–New Patterns of Management

• Authoritarian

• Paternalistic

• Consultative

• Participative

• Later: Partnership (Along with Bob Doyle)

Theory–7 of 15–Fred Herzberg 1966–The Motivation to Work–1

of 3

• First of Two Factors–Motivating Factors Intrinsic to the Work Being Done – Recognition – Achievement – Advancement – Personal Growth

Theory–8 of 15–Fred Herzberg 1966–The Motivation to Work–2

of 3

• Second of Two Factors–Hygiene Factors–Deficiencies in Extrinsic Factors– Company Policies – Working Conditions – Supervision – Salary– Peer Relationships

Theory–9 of 15–Fred Herzberg 1966–Motivation to Work–3 of 3• Motivating Factors Must Be Designed Into Work • Motivation is Intrinsic to Good Job Design• Basis for Job Enrichment • Expectancy Theory

– Comprehensive Model – People Will Be Motivated if the Job Has Enough

Variety and Challenge So They Feel a Sense of Accomplishment and Can Reward Themselves When They Perform Well

Theory–10 of 15–Sociotechnical Systems Theory–1 of 3

• Relationship Between Technical System Required for Task and Social System

• Any Production System is a Social System

• Managers Must Consider Both Aspects

• Theory Does Not Define an Approach to Organization Change

• Usually Includes Autonomous Work Groups (Self-Directed Teams)

Theory–11 of 15–Sociotechnical Systems Theory–2 of 3

• Complex Subset of Requirements Under Self-Directed Teams–1 of 2 – Joint Committee to Work – Control Variances Close to Event Origin– Feedback to Where Action Occurs – Skill-Based and Competency Pay – Implementing Business Process

Reengineering

Theory–12 of 15–Sociotechnical Systems Theory–3 of 3

• Complex Subset of Requirements Under Self-Directed Teams–2 of 2 – Team May Have Input to or Control of–

• Hiring • Training • Work Assignment • Performance Assessment • Promotion

Theory–13 of 15–Sociotechnical

• Worker Ranking of Reward Factors Higher Than Pay

– Having Interesting Work

– Their Work Being Appreciated

– Keeping Themselves Employable

– Being Kept "In on Things"

Theory–14 of 15–Supervisor Rank

• What Supervisors Think Workers Think– Usually Think Pay is the Highest Ranking

• It's Not–It’s Usually at the Middle of the List

– Workers Like Being Kept "In on Things"• Supervisors May Rank This Dead Last

– Managers Rank Listening Skills Very Low as a Requirement for Upcoming Managers

• But, Weren't Managers Workers Once?• A Case of Forgetfulness and Deafness?

Theory–15 of 15–Summary

• Over Time the Work Force Has Risen Through Levels as Prosperity Generalizes – Maslow – Likert – Expectations Rise

• Motivators Become Satisfiers

– Loyalty Falls Away – Anomalies in Generations X, Y, Z

Range of Practices–1 of 5

• Term of Plan– Short-term: 1 Year or Less– Long-Term: 3 to 5 Years

Range of Practices–2 of 5

• The Basic Split is–– Individual– Group

Range of Practices–3 of 5–Individual 1 of 2

• Arbitrary• Merit–Yes, Merit • Bonus • MBO• Balanced Scorecard• Key Contributor • Skill-Based • Competency-Based

Range of Practices–4 of 5–Individual–2 of 2

• Lightening Bolt or Spot Awards

• Stock–Myriad of Variations– Options– Restricted Stock– Equity Simulator – More Later

Range of Practices–5 of 5–Group

• Profit Sharing • Team Incentive • Scanlon • Rucker • Improshare • Gainsharing

The Case Against Incentives–Alfie Kohn–1 of 5

• Start With Alfie Kohn–Books, Articles, Speeches, TV, etc.

• Punished by Rewards • The Trouble with Gold Stars, Incentive Plans,

A's, Praise, and Other Bribes • Seminal Article in the Harvard Business Review • Speeches all Over the Country • Appearances on Today Show

The Case Against Incentives–Alfie Kohn–2 of 5

• Theory Bolstered by Lots of Research

• Reward Destroys Intrinsic Interest in Work

• The Group Without Reward–– Stays on Task Longer – Does a Better Job – Is Interested in the Work

The Case Against Incentives–Alfie Kohn–3 of 5

• ...We've Turned American Industry Into a Giant Skinner Box With a Parking Lot

• Other Prominent Thinkers Would Agree With Him to a Degree – Deeming – Drucker – McGregor – Doyle

The Case Against Incentives–Alfie Kohn–4 of 5

• Kohn Cites Only One Substantial Real World Example

• But, What if He's Right?

• For Awhile it Won't Make Any Difference

• No One Believes Him

• And, Nobody has Heard Much About Him Lately

The Case Against–Alfie Kohn–5 of 5

• What Do I Do With My Clients?

• Since Reading "All About Alfie," I Explain It to Clients

• Tell Them My Stance is Neutral

• I'm Monitoring Events

• I'm Open on the Issue

• It's Always Been the Case That Incentives Can be Destructive

Feasibility–1 of 4

• Ability to Measure (or Judge)

• Absolutely Critical to make Sure You Can Measure

• Frequent Source of Breakdown and Doom of Plans – In Design Phase – Later, When Plan Needs to Be Changed – Can Sour the Whole Effort

Feasibility–2 of 4

• Getting Management on Board – Best if It's Their Idea in the First Place – Even Then, You May Have a Daunting Education

Job – Otherwise, Make Really Sure You've Captured

Them

• Write a Compensation Philosophy–Be Serious

• Management in the Loop Throughout

Feasibility–3 of 4

• Work Force Readiness–1 of 2 – Assessment of the Work Force

• Intent–How Will They Respond to Incentives? • Customary Tools to Determine

– Individual Interviews

– Focus Formal Survey

– Follow-up Surveys

– Usually Done by an Outsider

– If Incentives Have Been Used, the Picture Changes• Assessment Becomes Analysis of What Has Happened

Feasibility–4 of 4

• Work Force Readiness–2 of 2 – If the Assessment is Bad News–Remedial

Work Has to be Done (or You Have a “Kohn” site)

• Host of factors May Have to be Worked on – Corporate Strategy – Training – Trust Building–Very common – Changing the People – Yes–Firing and Hiring

Plan Design–1 of 17–General

• Eligibility • Goal Setting Process • Performance Standards and Measures • Payout Amounts • Payout Frequency • Payout Form–Cash, Stock, Other • Plan Document • Communications Program

Plan Design–2 of 17–Eligibility–1 of 3

• CEO for Sure, but How Much Further Down? • Trend Has Been to Push Lower and Lower

– Often to the Shop or Office Floor–In the Name of– • Pay for Performance • Work Force Involvement • Keeping a Lid on Fixed Base Pay Costs

• Gainsharing is an Example of the Ultimate CEO Down to the Janitor System

Plan Design–3 of 17–Eligibility–2 of 3

• Sales–Almost Without Exception

• Information Processing– Some Levels Sometimes

• Financial Jobs–Usually Higher Levels

• Operations–Can Go Deeply Here

• HR–Usually at the Top of the Org Chart

• Legal–Top of the Org Chart Only

• R&D–Sometimes–Can Be Tricky Here

Plan Design–4 of 17–Eligibility–3 of 3

• Individual Jobs or People Now Considered

• What I Often Encourage Organizations to Do–– Opt for Ultimate Flexibility and Fluidity

• In "The Job is Dead" Context– – Individual is Only Way

Plan Design–5 of 17–Complexity–1 of 2

• Ability to Manage Complexity

• Don't Build It If You Can't Manage It

• Don't Over Estimate Your Ability to Manage

• If You Take Away One Concept Today, Make It This

Plan Design–6 of 17–Complexity–2 of 2

• Every Organization Has a Set Level for This • Can Be Changed Only With Great Difficulty • Lots of Side Effects • Unintended Consequences • Unanticipated Consequences • Mismatch of Tolerance With Business Strategy

Plan Design–7 of 17–Measures–1 of 2

• Must Match What Organization is Trying to Do – Simple at Some Levels

• Changes in Return in Investment

– Complex and Subtle at Others • Matching Competency Plan to Corporate Strategy• Linking Goals at lower Levels to Strategy • Qualitative, Judgmental Goals

Plan Design–8 of 17–Measures–2 of 2

• List Can Go on Forever – EVA – ROI – CFROI – Rejects – Productivity– The Customer Feels Good

Plan Design 9 of 17–Payout Levels

• Threshold

• Target

• Expected Maximum

• Capped or Uncapped?

Plan Design 10 of 17–Payout Frequency

• Affected by Design, Intent, and Economics– Annual– Semi-annual– Quarterly– Monthly– Weekly

• Tied Back to Complexity Issue Also

Plan Design 11 of 17–Stock–1 of 7

• Is Stock on the Table at All? – If Yes, Sleep Through the Next Two Slides

• Is Anything That Even Smells Like Stock on the Table? – If Not, The Payout Forms Will Be Limited

Plan Design–12 of 17–Stock–2 of 7

• Some Non-Stock Alternatives–– Equity Simulators

• Phantom Stock • Shadow Stock

– Performance Units Performance

Plan Design–13 of 17–Stock–3 of 7

• Only a General Overview of Stock as a Payout Today

• Subject Can Be Very Complex

• Don't Tread Lightly in This Area

Plan Design–14 of 17–Stock–4 of 7

• Stock Dilution– Any Stock Payout Dilutes Owners' Interests

• Oops, New People May Have a Big Say – Or, May be a Thorn in the Side of

Management

Plan Design–15 of 17–Stock–5 of 7

• Staying Private – Valuation of Stock – Keeping Plan Members Motivated – For Buy Backs of Stock – Controlling Ownership

• Exercise Great Care Drawing up Plan

• Securities Specialist Lawyer Should Be Used

Plan Design–16 of 17–Stock–6 of 7

• Going Public – Transition Plan– Keeping People On Board – Making People Rich – At Least Some of Them

Plan Design–17 of 17–Stock–7 of 7

• FASB

• State Securities Laws

• Lawyers, Accountants, Consultants, Software

• Public Relations

Implementation and Monitoring–1 of 2

• Largest Issue is Communications – Don't Let it Degrade Into a Program – Make it a Learning Effort– Plans Have to be Translated Up and Down

the Line – Test What Gets Communicated– Is the Plan Understood as Intended?– Tell Them Up Front the Plan Can and Will Be

Changed (Check Your Comp Philosophy!)

Implementation and Monitoring–2 of 2

• Monitor Progress Toward Payouts

• If the Plan Looks Off Target, Make a Correction

• Don't Let it Get Driven Into a Ditch

• There's Tons of Information Out There

• Ask for Help

Klemm's Quick Guides for Incentives–Repeated

• As Much Art as Science

• Follow a Process not a Program

• 7.5% to 15% Minimum

• Ideally 3 Goals, but 2 to 4 Maybe OK

• One Page for Individuals

• Fix Right Away

Team Exercise

Final Thoughts