YOUR BUSINESS ...  INCENTIVES!

In this and previous articles we have been reviewing some of the essential elements which go into a successful business startup or expansion.  One of the least under­stood aspects of management is the proper use and design of incentive programs. Webster's defines "incentive" as encouragement or motivation.  Unfortunately, many incentive programs provide reverse motivation, instead of the goal of increasing profit to the company (and the individual).   

Typically, the simplest form of sales incentive program is a commission based on volume.  It is essential that the program reward increasing sales volume with an increasing percentage bonus.  An example of the wrong way is: 

            Give a salesperson a 10% bonus on sales under $200,000, and 5% on sales exceeding $200,000, along with a $30,000 base salary.   Most sales repre­sentatives will earn between $40,000 and $50,000, since they get paid $10 for every $100 of sales up to $200,000 and only $5 for ever $100 sales thereafter.  It doesn't take them any less effort to make the $201,000 of sales volume, so most will make sure the extra volume ends up in the next year, when they get paid twice as much.

A better program would be to have a lower base salary, with graduated commissions which encouraged increased sales (and profitability  to the company): i.e.: a $15,000 to $20,000 base salary, with 2% on sales to $50,000; 4% for 50,000 ‑ 100,000; 8% for $100,000 - $200,000; and 15% over $200,000.  Assuming the company's unit breakeven is under $200,000, the firm can afford to give away greater commissions for large sales volume.

The highest paid entity in the company should be those who contribute most to the profitability of the firm.  This is not necessarily top management, but more frequent­ly the sales force.   Fortunately, in new and emerging firms, the founders are usually the key sales representatives as well.  A smart way to design initial compensation plans for new firms seeking loans or investment capital is to set a very basic initial salary to the founders, but give some type of graduated commission as sales (or even better - profits) increase.  This raises the comfort level for potential investors, since they will realize they are not being asked to support the lifestyle of the founders unless the owners are doing something recognizable to help the business grow.

In addition to sales incentive programs, many innovative programs can be designed to encourage other employees.  For example, if you have a firm involving delivery or service personnel who are driving about and have occasion to meet the general public.  Print some cards offering a special discount on your product or service.  Give them to the traveling employees, and code them so that the employee can be identified when the card is returned.  Whenever new business arrives as a result of cards the employee has distributed, give the employee the net discount (or give a set amount per new lead) as a bonus.

There are several ways that overall corporate growth can be incorporated into a company-wide plan:

1.  Each month, put all profits in excess of 6% of sales into a "pool."   The employees split 25% of the pool. The program is self-funded, as  the company has already made 6% before any bonuses are paid.   Be sure to decide if you want a formal "profit sharing" program,  which is governed by tax law, or a more informal incentive plan,   which is easier to set up and administer.

2.  Investigate a phantom stock plan. You keep control of the voting common stock. Works like an ESOP but not with actual voting stock. Each employee has an incentive for the company to grow and for the value of the common stock to increase yet they are rewarded as if it were actual common stock.

If you truly believe that your employees deserve rewards for performance, then you should accept that they are probably best resource to define those rewards.   Establish some guidelines, organize the team, and let them work out a proposal. Reserve the right of a good manager, which is to say "NO" when appropriate, but chances are, you will be pleasantly surprised.

With a little creativity, similar incentive programs can be devised to encourage employee cooperation and cost‑reduction efforts within the firm, not just sales-related activity.

Ralph Helwig is President of Economic Strategies, Ltd., a consulting firm established in 1983 which specializes in assisting entrepreneurs in starting and financing businesses (www.econstrategies.com).