Incents and Sensibility

Jun 01, 2007 9:30 PM  By

Incentive programs have been a blessing for home decor and gifts merchant Home Interiors. Thanks to performance bonuses tied to improving inventory accuracy, the Carrollton, TX-based company was able to eliminate taking physical inventory each year.

Taking inventory was an arduous process that required the shutting down of the distribution center for an entire week, says vice president of distribution Dan Zipes. But now, he says, “we’ve added an entire week to our selling cycle, and our inventory accuracy is way up.”

Investing in an employee incentive programs can indeed pay off. According to the Evanston, IL-based Forum for People Performance Management and Measurement, an effectively structured incentive program can increase team performance 44% and individual performance 25%. Incentivized staff have improved attitudes about their job and the company — attitudes that they project to your customers.

Incentive programs can be designed to boost productivity in a specific area of the operation where you need help, such as in receiving or picking. They can also reinforce and reward every specific behaviors. The best programs create a win-win between employees and the company. Workers see the rewards of their extra effort, and their effort helps the company achieve its goals.

Home Interiors spends some $300,000 a year on incentive programs tied to a wide array of initiatives, such as increasing warehouse safety and improving on-time delivery, says Zipes. “It may seem like a large amount of money, but we have seen the benefits such as low incidents of workers’ compensation [due to fewer accidents], better order accuracy, and on-time delivery of 99.9%.”

CAVEATS AND GOLDEN RULES

Setting up incentive programs can pose administrative challenges. And if the goals aren’t considered in context, an improvement in one area could lead to declining performance in another. An incentive program that rewards the fastest picker, for example, may increase the number of orders picked per hour. But it could also increase the number of inaccurate orders shipped, which in turn would drive up return rates.

Setting up a program tied exclusively to labor or productivity standards “will yield benefits only in this area,” says Kate Vitasek, founder of Bellevue, WA-based consultancy Supply Chain Visions. “A better way to approach this is to look at what the company is trying to achieve as their desired outcomes. Usually increasing productivity standards is only one part of the desired results.”

Vitasek recalls the time a client created an incentive plan in which all departments devised three metrics for which employees were compensated. By year’s end, she says, everyone was meeting or exceeding his targets. The problem? Even as the company was paying out large bonuses, it was losing money because the chosen metrics created functional silos and negative behaviors.

Because each area within operations has a cause-and-effect relationship with other areas, be sure to include as many employees in your incentive program as possible to ensure that everyone is on the same team. For example, if not for the replenishers, the pickers would never make their numbers, so a program that rewards only pickers would not be fair.

Of course, the more inclusive a program is, the more difficult it may be to find rewards that will motivate all potential participants. Supervisors and managers may not be as motivated by small cash payments as hourly employees, for instance.

The two golden rules of an effective incentive program:

  • Base the program on corporate goals that everyone can understand and follow.
  • Tie the goals to real and measurable performance that is not too far from current performance in terms of metrics or time frame as too seem unobtainable.

You must also consider worker culture and corporate culture when developing a plan, says Wayne Teres, a Framingham, MA-based operations consultant. Management must fully support the program, and employees must understand how the objective can be met for the award.

“Constant communication of the program is key,” Teres says. Too often, companies announce the incentive program, “and then that’s the last the employee hears of it.” So be sure to give employees regular status reports.

MAKING A PLAN

When developing an incentive plan, you naturally want to start by determining your objectives, says Rick Blabolil, president of Marketing Innovators, a Rosemont, IL-based performance management consultancy. Where is the performance gap in your company? Where are the opportunities for improvement? Be sure to consider both short- and long-term quantitative measures.

Next, analyze how the program will affect the key departments in your company. Set up a spreadsheet to estimate the cost of your program. Run what-if scenarios taking into account objectives being met and surpassed. “I’ve seen some companies get into trouble with their inflated budgets from incentives,” Blabolil says.

Blabolil urges companies to use the 80/20 rule when budgeting for the program: 80% of the budget should go into the employees’ hands, with 20% spent on administrative fees.

Once you establish your budget, create an award value. How will people qualify for recognition, and in what terms will that performance be tracked — in dollars, say, or via a point system?

If the program is based on revenue, that’s an easy enough objective for your workers to understand: Meet X standard and get Y dollars. But some companies use a point system to clearly distinguish rewards from cash compensation, awarding 10,000 points for a 5% increase in performance, 20,000 points for a 10% increase, and so on. By awarding points at specific intervals of improvement, Blabolil says, you’ll give your workers extra reason to reach the next level of performance.

When determining what to offer as an incentive, Teres sees no harm in simply asking your employees, “If we were to create an incentive program, what would you want the rewards to be?” That way, employees not only get what they want but they also feel involved in the decision-making process, and consequently are more likely to feel committed to the program.

It’s also important to consider any external factors at play, Teres says. For instance, is there a recession? What’s the unemployment rate in your area? What would best reward or motivate your workers now? Women’s apparel cataloger/retailer J. Jill uses cash as an incentive, but it has also found that rewarding employees with gas cards works wonders, “especially considering where gas prices are at these days,” says Kathie Lynch, vice president of fulfillment operations for the Hingham, MA-based merchant.

A FEW DANGERS

You should be aware that there are some risks with any incentive plan. For one thing, as mentioned earlier, a program may cause workers to create a new problem by overcompensating for the original problem.

What’s more, not every employee is going to buy into an incentive program. “The 20-60-20 rule applies,” Blabolil says, meaning that 20% of your employees will continue to perform at a high level regardless of the incentive program; 60% of your employees will may be incented to perform at a higher leve. The remaining 20%? “They probably won’t budge,” Blabolil says.

According to Home Interiors’ Zipes, employees must understand that bonuses are something they need to earn. “The moment the employee expects a reward, you lose the intent of the incentive program,” he says.

Not all companies need to implement formal incentive programs in order to boost performance, Vitasek adds. People generally want to do the right thing — and pointing them in the direction of “right” and fostering an environment where management cares about employees is often all it takes. Incentives can help you achieve the desired results quicker — but they may not be needed to get the results.

Whether your incentive plan leads to productivity increases or ends up on the rocks depends on the course you set. But being aware of the obstacles will help you establish a win-win program.

A few thoughts about cash…

Cash is king — except in incentive programs. According to operations consultant Kate Vitasek, cash is a good incentive especially in response to companywide goals. But for small performance goals, such as improving the number of units picked, you may be better off with other rewards, from recognition to small gifts. Items such as gift cards or gas cards can be used more frequently to reward positive performance.

“Cash is a motivator, but it isn’t always the best one,” says Debra Ellis, president of Barnardsville, SC-based Wilson and Ellis Consulting. “I have found that weekly programs, such as most units picked where the winner gets bragging rights and a $25 gift certificate, can significantly improve production rates.

Keep in mind that different people are motivated by different things. “The best programs I have seen have let the employees pick their rewards,” Vitasek says. For some, that’s money; for others, it’s time off.

If you do decide to use cash as the carrot, as home decor merchant Home Interiors does, be sure to cut a separate bonus check to present to the employee. “It drives our payroll department crazy, but I want our employees to understand that payout bonus was something earned over and above their regular paycheck. A separate check achieves that,” says vice president of distribution Dan Zipes.

And be sure make the check amount net of taxes. “If you say to the employee, ‘Your reward will be $25 for meeting the objective,’ and they get $14 after taxes, that’s sending the wrong message,” Zipes says. — MDF


Home Interiors employees receive separate bonus checks in addition to their regular paychecks.