Post on 22-Jan-2018
How to Build a Small Business Bonus Plan
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7700 Irvine Center Drive, Suite 930 Irvine, CA 92618 949-852-2288
www.VLadvisors.com www.PhantomStockOnline.com
Today’s Presenter:
Tom MillerPresident
(949) 265-5700tmiller@vladvisors.com
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Vision: Help Businesses Build and Sustain a Performance Culture
Accelerate performance capabilities by designing pay strategies that transform employees into growth partners.
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If you do that…
• Quality of talent will improve.• Employee engagement will expand.• Performance will be magnified.• Business growth will be accelerated.• Shareholder value will increase.
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Today’s Focus
Bonus Plan: Premises:
What makes a plan successful?
Goals Metrics Communication
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If you don’t have a bonus plan . . .
Either you don’t think you’re ready
Or you don’t have the confidence you can do it right
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Incentive Plan Denial (for companies that do have a plan)
Two categories of companies : Those that know they have bad bonus
plans Those that think they have good plans
but actually have bad ones.
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The Data
World at Work 2016 Survey
Only 10% of responders indicated they felt their annual incentive plan was effective.
These responders were, generally, representatives of larger, successful companies. If large companies can’t get it right (i.e., those with access to high-paid consultants and experienced executive leadership), what chance do smaller companies have?
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VisionLink’s Experience
Hundreds of plans Based on the standards embraced by major industries,
consultants, and HR professionals for nearly a century When examined—not proving effective (not improving
productivity)
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Why?
“…when financial incentives are applied to increase…motivation, intrinsic motivation diminishes. A meta-analysis of 128 independent studies conclusively confirmed this effect.”
(“Stop Paying Executives for Performance,” HBR, February 23, 2016)
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Hmmm…
Traditional bonus plans aren’t effective
But you have a commitment to your employees
Can you simply raise salaries and compete for talent . . . and create a pay-for-performance culture?
So, what are you to conclude?
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Resolving the Paradox
Cause & Effect: Most bonus plans fail precisely because they attempt to impact behavior. The data are complementary, not contradictory.
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What to do?
Build a partnership relationship with employees by sharing financial value with those who help create it.
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Promoting a Partnership Relationship
Key to:1. Avoiding manipulation2. Eliminating entitlement 3. Stimulating innovation and
stewardship4. Creating alignment
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Premises, Premises
A premise is defined as “a proposition supporting or helping to support a conclusion.”
One adopts a premise (believes in a concept or principle) and then acts in accordance with it in the hope of achieving a certain result. However, the desired outcome can only be fulfilled (presumably) if the premise is correct.
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The Wrong Premise (the typical one)
Influence Behavior Through Careful Selection of Plan Metrics
Reward your employees for achieving results that are as close as possible to their job duties. This typically includes the effort to “select the best metrics” for each employee or at least for every department. Then assume that all the collective mini-improvements will roll up into shareholder value creation.
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Metrics Focus
8 Problems1. Impossible to link every metric to true
value creation.2. Multiple KPIs create confusion and sap
motivation.3. A focus on behavior incentives can lead
to the opposite behavior. 4. Difficult to find metrics for every
position.5. Results may be manipulated or
loopholes exploited.6. Impossible to equalize metrics across
individuals and departments.7. Unintended and unanticipated negative
consequences.8. Pursuit of “perfect” metrics is a time
waster.
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Results, not Methods
"You cannot hold people responsible for results if you supervise their methods.“ (Stephen R. Covey)
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The Right Premise
Reward employees for achieving the shareholders’ most important financial results and treat them as growth partners.
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Change in Terminology & Mindset
Value-sharing instead of paying incentives.
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Shareholder’s Most Important Result
Sustainable and growing profitability
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Central Metric (for funding the plan)
Focus on One of These: Profit Increase in Profits (% or $) (Sometimes: Revenue Growth)
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Not Just Profit but Productivity Profit
Productivity profit is that surplus that can be attributable to the productivity of your people, not just your capital at work.
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Case Study
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Keith Williams Assumed leadership of UL in 2005
Company carrying considerable debt
Losing market share
Low employee morale
UL had become bureaucratic and “siloed”
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Core Changes Shift from “Incentives” to “Value Sharing”
Took away local measurements driving management incentive plans—all paid on same metrics
“We live together and we die together”
Aligned everyone behind company success
“I call it ‘pay the company first.’ ”
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How do you apply this in a small co?
Identify your most important “profit” metric
Select the threshold amount of that profit that justifies employee bonuses
Begin sharing value above that threshold
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“Basically, up to the company’s operating profit target, all of the profits go to the company; and only after that target is met, do we start funding the incentive pool.”
Example: If UL’s target is $80 million-- 100% of first $80 in
profit goes to company The next $20 million
goes to the incentive pool
From there on, 50/50 between company & incentive pool
Pay the Company First
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Pay the Company First
Once value creation is defined, compensation can follow a formula for sharing value in a way that aligns key producers with the company’s business plan and priorities.
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Setting Payout Thresholds
Base
Target (budget)
Superior
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Other Metrics
Minimum profit thresholds must be met first. Then…
Department or team metrics
Non-correlated factors (customer retention, customer or client increase, etc.)
Individual performance metrics
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Org Unit Performance
Overall company performance should be primary objective
Org Unit performance can be a secondary objective
▪ Some of the best incentive plans in the world are only tied to company performance
▪ Org units should be utilized when employee line of sight is heavily (if not solely) focused on the org unit
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Allocation to plan participants contingent on:
Company Performance – Employees should have all or a majority portion of their bonus based on company performance
Org Unit Performance – A portion of an employee’s bonus can be allocated based on department, location, division, or business unit
Plan Weighting/Allocation
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Plan Weighting/Allocation
Make overall company performance the primary objective (e.g. ~60 - 100%)
Organizational unit success should be secondary objective (e.g. ~40 - 20%)
Weight the overall incentive:
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Individual Performance
Trend is to disconnect performance from incentive pay
Performance Management is still important
Managers more likely to be honest about performance if incentives are not directly correlated to performance rating
If performance is deemed “Unacceptable” discretion should be utilized to eliminate incentive payment
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Headlines
Performance Management
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Plan Discretion
What about employees who made special contributions over the course of the year?
Create a discretionary reserve inside of plan funding
Reserved for “exceptional” performers only
Often held at the top of the organization (not cascaded down to individual managers).
Nomination process.
Don’t wait until the end of the year to recognize performance.
Essentially, these are funded “spot” awards
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Is the “Right” Premise Always Right?
Exceptions
Sales Compensation
Project Specific Incentives
Time Periods or Projects with no Projected Profits
Revenue Instead of Profits
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Remember the Core Principle
The core principle behind the right premise is to avoid trying to micromanage behavior through an incentive program (“do this and you get that”).
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Let’s Restate the Principles behind a Successful Plan
Adopt the Right Premise
Treat employees like partners
Focus on outcomes, not behaviors
Trust and engage
Don’t over-engineer through key performance metrics (a sure indicator of failure)
Build the Funding around Profitability
No payment if Base not achieved
Emphasize Target and Superior
Use Org Units as a Secondary Component (if you use at all)
Use Individual Performance Prudently
Reflect employee performance in the merit program
Allow for some discretion in the value-sharing plan
One last very important thing (see next slide)40
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Crucial to the success of the plan
Employee communication statements should communicate incentive target opportunity
Regular performance updates during the plan year
“Partners” understand basic company performance
Private companies don’t typically disclose all financial information to all employee “Partners”:
Financial performance in private companies communicated via percentage against target
“After Q1 we are tracking 95% against our ‘Target’ financial performance”
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Reinforce Line of Sight
Rewards
What’s in it for
me?
VisionWhere?
Strategy How ?
Roles and Expectations
My Contribution?
Rewards
What’s in it for me?
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Market a Future that’s Relevant
Communicate desire for a growth partnership
Demonstrate commitment
To the future business
To key contributors
Promote, don’t just communicate Be consistent
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Market a Future that’s Relevant
Here’s our future Here’s how we’re going to get
there Here’s the role we picture for
you Here’s how we encourage our
people to grow and contribute
Here’s our philosophy about pay and rewards
Here are our specific pay programs
Here’s how our pay programs could work for you if we achieve our plan
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Employee Value Statement
Year 1 2 3 4 5
TargetedResults
100% 100% 100% 100% 100%
Salary $160,000 $166,400 $173,056 $179,878 $187,177
STVS $64,000 $66,560 $69,222 $71,991 74,871
LTVS(EOY)
-- $74,000 $186,000 $311,000 $448,000
401(k)@7%
$17,120 $36,123 $57,169 $80,428 $106,086
Total Cash
$224,000 $232,960 $242,278 $251,970 $262,048
WealthAccrual
$17,120 $110,123 $243,169 $391,428 $554,086
TotalValue
$241,120 $567,083 $942,407 $1,342,636 $1,767,343
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Chronology for Building a Successful STIP
1. Follow the Right Premise by establishing a basic plan approach
(scope, funding parameters, company only or departments)
2. Select your participants and organize them by group (tier or level)
3. Create a budget (total value of the pool at various performance
thresholds); allocate pool levels by employee tier
4. Assign your metrics (the Key Performance Indicators that produce
awards)
5. Allocate employees’ awards between company and business unit
results
6. Study, test, and confirm values
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Vitals for Operating a Successful Short-term Incentive Plan
1. Communicate the plan details early and often2. Demonstrate the plan value opportunities on an individual basis3. Reveal plan progress throughout the year (at least quarterly)4. Create plan “rules” and live by them5. Be flexible and recognize special contributions periodically (keep a
reserve)6. Review and renew the plan quickly at the end of the year
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How does VisionLink help?We employ an
interactive online tool and teach you
how to use it.
We show you how to communicate and manage the plan effectively.
We build your plan with you
(as a Design Team).
How Does VisionLink Help?
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www.BonusRight.comwww.BonusRight.com
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What will it do?
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Indicate on survey if you would like more information including a demo.
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Today’s Presenter:
Tom MillerPresident
(949) 265-5700tmiller@vladvisors.com
7700 Irvine Center Drive, Suite 930 Irvine, CA 92618 949-852-2288
www.VLadvisors.com www.PhantomStockOnline.com
Thank You!7700 Irvine Center Drive, Suite 930 Irvine, CA 92618 949-852-2288
www.VLadvisors.com www.PhantomStockOnline.com www.BonusRight.com