Putting incentive compensation to work.Bonuses based on meeting budget goals satisfy staff and serve association objectives. Remember when salary increases averaged 10 percent, and you could reward exceptional performance with increases as great as 20 percent? Those days--driven by double-digit inflation--are gone, and the compensation paradigm is radically different. According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the most recent salary budget survey published by the American Compensation Association, Scottsdale, Arizona Scottsdale (O'odham Vaṣai S-vaṣonĭ) is a city in Maricopa County, Arizona, United States, adjacent to Phoenix. Scottsdale has become internationally recognized as a premier and posh tourist destination, while maintaining its own identity and culture as " , the average salary structure movement among U.S. companies for 1993 was about 2.7 percent, and actual budget for salary increases for 1993 was 4.3 percent. So an average performer received an increase in the neighborhood of 3 to 5 percent. In terms of dollars added to the paycheck, that's not the same kind of incentive we once could offer, and it does not give management an effective communication and motivational tool. Four years ago, this altered dynamic prompted the Associated Equipment Distributors, Oak Brook, Illinois Oak Brook is a suburb of Chicago in DuPage County, in Illinois. The population was 8,702 at the 2000 census. History Oak Brook was incorporated as a Village in 1958, due in large part to the efforts of Paul Butler, a prominent civic leader and landowner whose father had , to consider a more meaningful compensation reward mechanism for its staff members. Most of AED's board members had successfully used incentive compensation in their businesses, and they encouraged and supported our exploration. Are incentives right for nonprofits? We started in nearly uncharted waters Uncharted Waters (Japanese: 大航海時代, Daikoukai Jidai, literally Great Navigation Era) is a popular Japanese video game series produced by Koei as part of its rekoeition games. . Because of fundamental differences between for-profit and nonprofit organizations Nonprofit Organization An association that is given tax-free status. Donations to a non-profit organization are often tax deductible as well. Notes: Examples of non-profit organizations are charities, hospitals and schools. , few associations had successfully adopted variable compensation. Common objections include the following: * It is not an association's fundamental purpose to earn a return on investment, so compensation based on financial performance is inappropriate. * Staff will have incentive to act for short-term gain Short-term gain (or loss) A profit or loss realized from the sale of securities held for less than a year that is taxed at normal income tax rates if the net total is positive. rather than the long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. interests of the association. * Members will object that staffers have the opportunity to get rich on their dues dollars when programs are successful in part because of good member governance Governance makes decisions that define expectations, grant power, or verify performance. It consists either of a separate process or of a specific part of management or leadership processes. Sometimes people set up a government to administer these processes and systems. and support. Some of these perceptions flow from the obsolescent ob·so·les·cent adj. 1. Being in the process of passing out of use or usefulness; becoming obsolete. 2. Biology Gradually disappearing; imperfectly or only slightly developed. belief that associations are most like public service organizations, and therefore their employees should be compensated at a reasonable fixed wage and be sheltered from the downside Downside The dollar amount by which the market or a stock has the potential to fall. Notes: You might hear someone say that the downside on stock XYZ is $10. What that means is that the stock could fall by this amount if things got bad. of market vicissitudes vicissitudes Noun, pl changes in circumstance or fortune [Latin vicis change] vicissitudes npl → vicisitudes fpl; peripecias fpl but, in trade, not benefit directly from the upside Upside The potential dollar amount by which the market or a stock could rise. Notes: This is basically an educated guess on how high a stock could go in the near future. See also: Bull, Downside either. This belief reflects a staff role traditionally limited to implementing the strategies and program agendas of the elected leadership, with limited ability to affect financial and other quantitative outcomes. At AED AED - Automated Engineering Design , we believe that market pressures are driving associations to behave much more like entrepreneurial en·tre·pre·neur n. A person who organizes, operates, and assumes the risk for a business venture. [French, from Old French, from entreprendre, to undertake; see enterprise. businesses, and thus they must adopt similar management practices. Still, we knew we needed expert help. One of our board members recently had implemented a structured incentive program at his company, and he felt it was working successfully. He referred us to Mike Wetherbee, of Maki-Wetherbee and Associates, a Minneapolis-based compensation consulting firm Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee consulting company business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a . Wetherbee helped us design the program based on our needs, objectives, and staff and volunteer leadership culture. He also assisted with implementation. His participation was key to board acceptance of the program. His outsider Outsider often refers to one identified as on the periphery of social norms, one living or working apart from mainstream society, or one observing a group from the outside, as used in:
Does money motivate? Before designing an incentive plan for AED, we looked at all the positive and negative issues we could think of. We looked particularly at the basic question, "Does money motivate?" We think money is a factor by which some people motivate themselves and others do not. Regardless of whether money motivates better performance, we agreed that money was an effective tool to communicate the priorities of the organization. We also thought the plan should strongly encourage and reward team success as well as outstanding individual performance. We came to view our incentive plan as a logical extension of our continuous improvement process, as it also addressed core issues in how we manage our business and provide service to our members. The plan therefore encouraged organizational, team, and individual goals, and long-term success strategies. Those characteristics of the plan have demanded enhanced communication among all staff. As a result, the plan has given us a stronger sense of shared vision and common destiny Destiny goddess of destiny of mankind. [Gk. Myth.: Kravitz, 78] See : Fate . It has also created a much stronger perceived connection between organizational and personal success. Letting principles guide us An incentive compensation plan must not undermine the association's mission. It was clear that one of our biggest plan design challenges was to ensure that we would absolutely not be tempted "Tempted" was the second single released from Squeeze's fourth album, East Side Story. Though it failed to crack the Top 40 in the UK or the U.S., over the years "Tempted" has become one of Squeeze's most well known songs, especially in North America. to strive for financial performance at the expense of member service and long-term health. For example, pricing products to maximize short-term Short-term Any investments with a maturity of one year or less. short-term 1. Of or relating to a gain or loss on the value of an asset that has been held less than a specified period of time. revenue might conflict with adding value to the package of services included in dues. If you don't enrich the value of basic services basic services, n.pl frequently insurance companies split dental procedures into basic and major categories. Basic services usually consist of diagnostic, preventive, and routine restorative dental services. , in the long run membership will suffer. In developing our plan, our consultant recommended that we design a structure combining organizational and individual or team incentives. With a staff of 27, AED relies on individuals wearing many hats. Increasingly, our practice is to set up teams to address specific objectives; team members may be chosen from outside the department primarily responsible. It is relatively uncommon for any individual to be solely responsible for an outcome. Most successes involve many people. Larger organizations with a more formal departmental structure, more rigid position descriptions and divisions of work, and less individual impact on overall organizational success might take a different approach. Another important consideration was that our financial structure relies heavily on nondues revenue, which amounts to more than two thirds of our gross income. Such income flows from a host of products, programs, and business services, each with its own marketing and sales challenges and potential for financial success or failure. This environment lends itself to setting goals that measure results quantitatively. This led us to the principle of basing all incentive goals on numerically nu·mer·i·cal also nu·mer·ic adj. 1. Of or relating to a number or series of numbers: numerical order. 2. Designating number or a number: a numerical symbol. measurable results, such as unit sales unit sales Sales measured in terms of physical units rather than dollars. Unit sales data are often used by financial analysts when evaluating the health of a company. , expense control, registration levels, memberships, revenues, net profit, and the like. This removes after-the-fact management discretion and subjectivity from the process of awarding incentive pay, and it allows participants to know exactly where they stand at all times with respect to their objectives and their incentive income potential. This sense of fairness and objectivity can be an important element in leadership and staff acceptance of the program. We also accepted as a fundamental principle of our plan that revenue and profit levels can be a proxy for performance in most cases. Revenue and profit are measures of total value delivered--perhaps not the only measures, but certainly very essential ones. As in most organizations, at AED some individuals have more direct responsibility for, and a larger impact on, program results, income, expense, and profit levels. But we wanted to strongly communicate through the plan's design that leadership believes each staffer plays an important role and has a stake in the organization's overall success. How AED's plan works To reflect these principles, all employees' incentive potential includes a two-part computation Computation is a general term for any type of information processing that can be represented mathematically. This includes phenomena ranging from simple calculations to human thinking. based on (1) total association revenues and (2) total net profit, with total revenues weighted about twice as heavily as net profit. Senior managers and others most directly responsible for individual program results also have one or more individual or team goals. This third component is weighted against organization goals (total gross revenue and net income per budget) depending upon the staff member's degree of direct responsibility for results. As a general principle, then, both senior managers and support people have strong incentives to achieve overall organizational goals, while program managers' incentives are more strongly tied to individual or team goals. Budget-based goals In our plan, the basis for both organizational and individual or team goals is the budget. So it is critical that management be absolutely committed to the integrity of the budgeting process. If staff are to receive incentive compensation based on achievement of budgeted objectives, plan objectives must be set and defended as though there were no plan. If leadership suspects that budget targets were set low to produce higher incentive payouts, the trust on which elected leadership accepts the incentive compensation program for staff will be broken. The chief staff executive must protect the rigor rigor /rig·or/ (rig´er) [L.] chill; rigidity. rigor mor´tis the stiffening of a dead body accompanying depletion of adenosine triphosphate in the muscle fibers. of the planning and budgeting process, or incentive compensation will be short-lived. Rigor in our planning and budgeting process means that the manager responsible for a program must propose and defend his or her budget estimates to the chief financial officer and the executive vice president. We challenge every number and require clear-eyed, factually fac·tu·al adj. 1. Of the nature of fact; real. 2. Of or containing facts. fac based justification for all income and expense items. Budget is the trigger for incentive compensation. If we don't make budget, there is no payout pay·out n. 1. The act or an instance of paying out. 2. A percentage of corporate earnings that is paid as dividends to shareholders. . When results exceed budget, payouts grow more or less linearly with the degree to which budget targets are surpassed, up to a maximum. All award formulas are expressed as a percentage of base salary. Each individual, prior to the beginning of the fiscal year and as the budget is being finalized See finalization. , meets with management to negotiate the individual and/or team objectives upon which his or her incentives will be based. These may be such areas as new memberships, convention registration levels, seminar attendees, training program sales, and book sales. We use almost anything we can measure in the financial statement, including expense control in specific areas. Of course, we scale incentive payment potential to the financial benefit the organization receives when achieving the goal. We wouldn't pay $5,000 to someone for making or saving us $10,000 better than budget; however, we might pay $500 or $1,000, depending on the difficulty of the accomplishment. As with individual and team incentives, organizational incentives are tied to budget. Gross revenues are weighted twice as heavily as net income in all individual formulas. For gross revenue, outperforming budget by 15 percent triggers the maximum potential payout. For net income, the targets are set much higher on the principle that as program revenues climb past fixed cost levels, a greater percentage of incremental Additional or increased growth, bulk, quantity, number, or value; enlarged. Incremental cost is additional or increased cost of an item or service apart from its actual cost. income falls to the bottom line. Increasing gross income without increasing net income, in order to manipulate manipulate To cause a security to sell at an artificial price. Although investment bankers are permitted to manipulate temporarily the stock they underwrite, most other forms of manipulation are illegal. the plan, doesn't pay. Thus, without net income, there are no awards, regardless of gross income levels. Associations with smaller staffs, especially those with flat or nonhierarchical structures, and where everyone on staff has some role in nearly all activities, might consider having no individual or team goal component. In this case, all staff incentive formulas would be keyed only to gross and net income goals. Such a policy conveys even more strongly a sense of shared destiny, total team ownership of organizational results, and inter-dependence of staff in the organization's success. Adding safeguards Several important considerations and steps remained at this stage of planning. First, we needed safeguards. We could not allow a situation in which incentive awards consumed con·sume v. con·sumed, con·sum·ing, con·sumes v.tr. 1. To take in as food; eat or drink up. See Synonyms at eat. 2. a. most or all of net income. We established the rule that no matter what the aggregate of award payments would otherwise be, they could in no case exceed one third of pre-award year-end net income. This might easily occur if many individual objectives were achieved, but for other reasons net income was low. We specified that if the sum of all awards exceeds one third of net income, each award is proportionately pro·por·tion·ate adj. Being in due proportion; proportional. tr.v. pro·por·tion·at·ed, pro·por·tion·at·ing, pro·por·tion·ates To make proportionate. reduced by the percentage that one third of net income is less than total computed payouts. It follows that if there are no profits, there are no payouts. The question arises whether in tight times, with reduced prospects for net income and thus incentive awards, might not such a plan sabotage sabotage [Fr., sabot=wooden shoe; hence, to work clumsily], form of direct action by workers against employers through obstruction of work and/or lowering of plant efficiency. Methods range from peaceful slowing of production to destruction of property. morale and motivation for staff members? Perhaps, but one of the underlying premises of our plan is that when times are good, the people who make it happen share the goodies good·y 1 Informal interj. Used to express delight. n. also good·ie pl. good·ies Something attractive or delectable, especially something sweet to eat. . In leaner times, we all share the pain. It's part of being a stakeholder stakeholder n. a person having in his/her possession (holding) money or property in which he/she has no interest, right or title, awaiting the outcome of a dispute between two or more claimants to the money or property. . Leadership must clearly communicate this principle, early and often. A few more rules protect the plan's integrity. All awards must be based on independently audited financial results for fiscal year-end Fiscal Year-End The completion of a one-year, or 12-month, accounting period. Notes: The reason that a company's fiscal year often differs from the calendar year and does not close on Dec 31, is due to the nature of company's needs. , and payments are not made until they are reviewed and approved by the executive committee. We also specified that accounting principles used to determine year-end results must be consistent with prior association practices--there are no games with capitalization capitalization n. 1) the act of counting anticipated earnings and expenses as capital assets (property, equipment, fixtures) for accounting purposes. 2) the amount of anticipated net earnings which hypothetically can be used for conversion into capital assets. , amortization, or depreciation. Rules also cover rights in the plan in the case of voluntary and involuntary involuntary adj. or adv. without intent, will, or choice. Participation in a crime is involuntary if forced by immediate threat to life or health of oneself or one's loved ones, and will result in dismissal or acquittal. INVOLUNTARY. separations, and provisions let management revise goals and award levels when job responsibilities change. Communicating the plan All of the design features, formulas, restrictions, and administration procedures must be defined in a written plan document. We presented our first plan document to staff in a seminar-style session. We present the document afresh a·fresh adv. Once more; anew; again: start afresh. afresh Adverb once more Adv. 1. at the launch of each new fiscal year and provide each participant with a copy. Vital to the plan's success is communicating with staff about progress throughout the year. We sit down at least quarterly with all staff and review the financial statement line by line. Everyone then sees how the organization is doing overall and can assess the prospects of their incentive awards at the end of the year. Maintaining a reserve fund There is one last potential problem with incentive compensation based on financial outcomes. What if, after the budget and incentive goals are set, the organization finds it in its interest to spend unbudgeted money. This could, at a stroke, decrease or wipe out wipe tr.v. wiped, wip·ing, wipes 1. a. To subject to light rubbing or friction, as with a cloth or paper, in order to clean or dry. b. the potential for incentive awards. Out of self-interest, staff might hide such needs from the board or become disappointed, demoralized de·mor·al·ize tr.v. de·mor·al·ized, de·mor·al·iz·ing, de·mor·al·iz·es 1. To undermine the confidence or morale of; dishearten: an inconsistent policy that demoralized the staff. , and cynical about the plan if such expenditures decrease or eliminate awards. AED maintains an appropriated reserve fund, built by contributions from net profits at year's end, to finance unbudgeted special projects. For example, if net income is $200,000, the board might elect to earmark earmark taking a piece out of the edge or center of the ear with a punch as an identification mark. The shape of the mark may be registerable under local legislation. $75,000 to the appropriated reserve. Recent examples of AED's use of this fund include one-time financial support for a lobbying coalition addressing a key legislative goal; unbudgeted research and strategic planning Strategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy, including its capital and people. related to reversing a declining trend in convention attendance; and a midyear mid·year n. 1. The middle of the calendar or academic year. 2. a. An examination given in the middle of a school year. b. midyears A series of such examinations. decision to develop a videotape videotape Magnetic tape used to record visual images and sound, or the recording itself. There are two types of videotape recorders, the transverse (or quad) and the helical. training program addressing a high-priority need. The expenses of the reserve fund do not appear on the profit-and-loss statement, only on the balance sheet. Thus, neither the degree to which we achieve our net profit goal nor the funds available for award payout (under our one-third-of-net-profit rule) are affected. If this is not feasible in your organization, you can try making board-approved rule revisions that essentially subtract A relational DBMS operation that generates a third file from all the records in one file that are not in a second file. the effect of the unbudgeted special project expenditures on award computations at the end of the year. We believe our incentive program has had a positive impact on both our association and our members. It has provided a vehicle for developing and communicating our association's goals and objectives at both strategic and tactical levels and for articulating those goals and objectives to both staff and the board. While we have a great deal of faith and confidence that we're doing the right thing with this program, it is still premature to report definitive results. Our first year was 1992, when results were generally in line with budget and we achieved a fairly modest level of award. With the construction recession hitting its worst depths in 1992-1993, there were no net profits and thus no awards. The coming year promises some recovery, so we hope to get a better reading. Time and the energy and expertise of our people will tell. Before You Adopt a Plan If you are thinking about developing an incentive compensation plan for your association, the following suggestions may be helpful. * Get some expert help. Pay is one of the most sensitive areas in the employment relationship. Association managers usually have little experience with incentive compensation. * Don't copy someone else's plan. Design yours to fit your situation. Copying an incentive plan from a for-profit business is especially ill-advised. * Spend a significant amount of time developing both organization and individual goals. This exercise is particularly worthwhile from a planning perspective. * Communicate early and often to all. The plan must be effectively and succinctly suc·cinct adj. suc·cinct·er, suc·cinct·est 1. Characterized by clear, precise expression in few words; concise and terse: a succinct reply; a succinct style. 2. communicated to all participants. They should understand the plan's concept and exactly how it affects them. Communicate frequently and fully as the year progresses so that all know where they stand. * Recognize that your plan will not be perfect. As things progress, the plan will need fine-tuning to address issues you missed in the initial design. In addition, you need to review and modify the goals and objectives each year to reflect the past year's results, the effect of the economy, and other influences, both internal and external. Management must learn to set ambitious but achievable goals. * Expect to spend some time and money in conceptual education for both board members and staff. Incentive plans are a relatively new concept for most associations. The Incentive Compensation Plan Document This abbreviated version of the Associated Equipment Distributors's plan, provided here as a sample only, summarizes the basic provisions. Purpose. The purpose of the program is to encourage staff to achieve maximum performance and to reward them based on the attainment of specified goal levels. Incentive opportunity. Each participant's incentive opportunity is based on the association's attainment of overall goals and objectives, and it may, where appropriate, include an individual component based on the individual participant's attainment of a personal goal or goals. Specified goal levels and their related incentive opportunities, as well as the maximum incentive opportunity, are detailed on a separate personal participation form for each staff member. Incentive computation. Each goal has four levels of goal attainment. The definitions associated with each performance level are as follows: * Level 1--acceptable/satisfactory. This level of performance meets the budgeted business plan. * Level 2--very good. This level of performance exceeds the budgeted business plan by a reasonable margin. * Level 3--commendable. This level of performance exceeds expectations by a considerable margin. * Level 4--distinguished. This level of performance represents truly outstanding achievement, for which there is perhaps a 10 percent likelihood of attainment. Each participant's incentive payment will be according to the achievement of levels specified on his or her personal participation form. There is no payment for less than Level 1 attainment. Level 4 is the maximum achievable payment. Payments will be prorated for achievement between levels. Limitation on incentive payments. Notwithstanding any other provisions of this program, the total of incentive payments to all program participants is limited to one third of association net income, based upon year-end audited financial statements. If the total of incentive payments to all participants would exceed one third of net income, each participant's actual payment will be reduced by the percentage by which one third of the association's net income is less than the total of incentive payments to all participants. Determination of incentive payments. After the end of the fiscal year, the executive vice president will determine the level of individual goal achievement and incentive payments to be made, based upon specific goals established earlier. The executive vice president will submit a schedule of all such payments to the executive committee for approval. Payments may only be made upon the express approval of the executive committee. Association goals. Association goals (gross revenue and net income) are defined as income before any incentive compensation payments are made. Procedures for accounting for income and expense shall in all cases be consistent with prior accounting practices. Termination of employment "Fired" and "Firing" redirect here. For other uses, see Fired (disambiguation) and Firing (disambiguation). “Gross misconduct” redirects here. For the ice hockey term, see Penalty (ice hockey). . In the event that a participant in this program shall voluntarily terminate his or her employment with the association prior to the end of the fiscal year, no payment pursuant to this program will be made. A participant whose employment is terminated by the association for reasons other than misconduct MISCONDUCT. Unlawful behaviour by a person entrusted in any degree: with the administration of justice, by which the rights of the parties and the justice of the, case may have been affected. 2. or cause prior to the end of the fiscal year will be eligible for an award that is prorated for the number of full calendar months of participation prior to the date employment terminates. A participant whose employment is terminated by AED for reasons of misconduct or cause will not be eligible for an award under this program and no payment against this incentive program will be made. Any payments made to terminated employees will be made at the same time as incentive awards are paid to other participants. Changes in employment status. If the job responsibility of a participant is substantially changed after the commencement of the program, the association reserves the right to make an equitable equitable adj. 1) just, based on fairness and not legal technicalities. 2) refers to positive remedies (orders to do something, not money damages) employed by the courts to solve disputes or give relief. (See: equity) EQUITABLE. adjustment in goals and award levels (upward or downward) for that person. Goals may be modified to reflect the responsibilities of the new position. Incentive payments. Incentive payments will be made following executive committee approval. It is the association objective to make payments not later than 60 days after the close of the fiscal year. This program does not constitute or provide a guarantee of employment or compensation to participants, and the association makes no commitment to adopt this or any other incentive compensation program in any future year. The executive committee will retain full discretion in the administration of this program, and decisions of the executive committee regarding changes or administration will be final. Modification, amendment, or termination of this program. The executive committee reserves the right to modify, amend, or terminate this plan as it deems necessary. If any modification, amendment, or termination is made, incentive earnings payable to date will be prorated based on the number of full months completed within the fiscal year. Payment for specific goals that are modified, amended a·mend v. a·mend·ed, a·mend·ing, a·mends v.tr. 1. To change for the better; improve: amended the earlier proposal so as to make it more comprehensive. 2. , or terminated will be prorated based upon the number of completed calendar months of the fiscal year. Sample Goals Individual goals: * Number of new members enrolled * Number of exhibit booths sold * Savings from budget on purchase of office supplies Office supplies is the generic term that refers to all supplies regularly used in offices by businesses and other organizations, from private citizens to governments, who works with the collection, refinement, and output of information (colloquially referred to as "paper work"). * Member enrollment in educational seminars Team goals: * Gross income from association's annual convention * Cost savings from budget in magazine publishing expense * Publication sales income Organizational goals: * Association gross revenue * Association net income Toby Mack is executive vice president, Associated Equipment Distributors, Oak Brook, Illinois. Mike Wetherbee, of Maki-Wetherbee and Associates, Minneapolis, provided suggestions in the preparation of this article. |
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