Welcome to this blog on Compensation.
I’ve always believed in a win-win philosophy – and not just with Clients and in negotiations; but with the team I work with also. With your employees, there’s a tendency to focus mainly on the bottom line, being efficient and generating returns. However, it’s just as important to invest back in your team, encourage and appreciate them for the hard work they do. I would like to share with you some of the approaches I have used throughout my career.
INCENTIVE COMPENSATION
Incentive compensation is something I have always believed in. I have put together many compensation plans and bonus schedules over the years; with one of the primary goals being to direct the individual where I need them focused. I therefore align the plan with the area of focus and reward them consistently with how they are performing. Compensation is therefore not only about incentivizing, but helping center your team on areas you need them aligned, to ensure success on their part and the company’s part.
Modeling a proposed compensation plan is important and it should be done, including multiple assumptions. Model it for all your different performers – from the star performer to the ones that don’t produce enough. Utilize a sliding scale that is appropriate for the different levels and various employees, commensurate with the contribution they are making. As long as you can see how their performance affects the company, you then become satisfied with compensating them accordingly. Modeling helps you confirm that what you pay them is compensatory with the performance you are receiving.
Incentive compensation plans are generally detailed and somewhat complicated to understand. Once completed, I share with each individual the details of the plan and make sure they understand it fully. If they don’t understand it, they will not be motivated to achieve everything you want. It therefore needs to be made clear what they are aiming for and what they can expect in return. I then reduce it all to writing to make it available for reference and clarification when needed. You want the individual to own it, invest in it and make the goals important to them too. At the end of the year, we then refer back to the document and I show them how they scored on their performance, how we calculated their bonus. When done this way, I’ve found everyone walks away very satisfied. It’s already hard enough to be a success, you therefore want to surround yourself with a team that is all pulling in the same direction. All compensation plans are confidential.It is critical that it remains that way and is shared only between a team member and their immediate supervisor.
Compensation plans factor in several key areas of performance. One key area that is important and I value highly is attitude. I compensate for attitude. If someone has a good attitude, they elevate the performance of those around them. If someone has a bad attitude, they bring the team down and make it difficult to work. Attitude is therefore a key factor and is worth rewarding.
PROFIT SHARING AND PERFORMANCE BONUS SCORING GRID
Everybody in my company has always benefited from profit sharing regardless of if they had a direct impact on profits. I believe each one contributed to the company’s success, and so should share in the profits based on their contribution. For most, it was a discretionary bonus while others received based on individual performance and their position.
The profit sharing was based on a formula that I evolved and improved on over the years. The formula creates a percentage of each team members annual compensation – and this becomes their bonus. The benefit of doing it as a percent of compensation is their compensation should be commensurate with the job they’re doing, the experience they brought and their performance; so, it properly weighs the bonus.
I’ve included a handout titled Profit Sharing – Performance Bonus Scoring Grid which shows the formula we use to calculate one’s percentage. Please refer to it as we continue. There are 4 Sections on the grid – A, B, C and D. To start with, Section A defines the Individuals’ Contribution Level as determined by their job responsibilities. This section is therefore based on each position and ranges between 8 and 50. A position would be assigned a score based on its impact on the company’s success. In the example, this position was considered a 26. Then we have the weigh-in factor of 4. The score is multiplied by 4 and its weight increased four times. You do not have to include the weigh-in – and can simply keep it at the score.
Moving to Section B which is the Quality of an Individual’s Performance Resulting in Reduction of the Company’s Risk. Being in the mortgage lending business, risk was a big factor for us, and this score ranged from 1 to 10. 1 being outstanding performance and 10 being unsatisfactory. If you look to the bottom of the grid, you see a multiplication of A, C and D scores to get a large number. Since risk was our underlying issue, that large number is then divided by B which is the risk score. In the risk world you therefore wanted to score a 1. If you were doing a great job helping us manage risk and you scored a 1, then your large number was divided by 1 and it remained a large number. However, if one did not perform well with risk and scored a 7, then their large number was divided by 7 and wasreduced considerably. To score close to a 1 on risk, an individual would need to best manage the risk they are responsible for.
Section C also has a 1 to 10 rating based on 6 different factors, namely: Overall Individual Performance, Customer/ Investor Relations, Attendance, Team Spirit, Attitude and Timely Performance – having a sense of urgency. On this scale 1 is unsatisfactory and a 10 is outstanding.
Section D looks at an Individual’s Productive Output; in other words, how well they are doing their job. This becomes especially useful when you have various people in the same position. One may double their output, and another achieves what they are required to. In this section one gets rewarded for being highly productive in their job.
The last stage is the formula at the bottom which calculates each Individual’s Performance Bonus Score. Multiply the score for A by the score for C by the score for D and divide that total by the score for B. In the example, the final score is 27,456. This score is calculated for every individual in the organization and then we add up everyone’s score. If the total of everyone’s score comes to 1,000,000; then you determine a person’s percentage share of the profit pool for the total 1,000,000. In this case that is 0.027% of the total profit pool they received. When calculated this way, the entire profit pool is accurately distributed.
Each Team Member would get a copy of their Performance Scoring Grid and it would be discussed in detail with them to ensure they clearly understood their score and how to improve on it.
This scoring grid may be more detailed than most companies would want. However, we based it on factors that we considered essential to performance and made it clear to the team what they should focus on to earn a larger portion of the profits from the overall profit. When the company performed well and there were large bonuses to pay out to the sales team, I included a delay component in a portion of the payment, as I wanted to avoid someone waiting for the big pay day and then resigning a month later.
ANNUAL BONUS PROGRAM
Personal performance and contribution to the company would bring in a bonus of up to 4% of one’s annual salary and having a positive attitude could earn one 2% of their salary.
I still apply this principle today to run Servant’s Heart Foundation and our family investments. Both Servant’s Heart and my family have investment portfolios. The Foundation portfolio funds all our non-profit work and we keep re-investing profits made from the portfolio. Our family investment portfolio is what supportsus and is run by the business President. Nobody on our team currently has anything to do with the return on the portfolio; their roles mainly are to support the President and me. We therefore came up with a ‘win together or lose together’ formula. If we get less than a 4% return on our portfolio, we score a zero. If we get a 10% return on our portfolio, then everyone one receives 10% of their salary in a bonus. Getting a 10% return on our portfolio is a win and receiving a 10% bonus on salary is a win, so everybody wins.
Majority of the people I work with have received the 2% bonus for attitude. Those who scored less were quickly able to change as they received clarity on what was required of them.
It’s important to note, if you just incentivize volume and don’t pay attention to margins then you can end up in trouble. Be sure to model out all possible scenarios and test what bonuses are paid out when certain margins are reached. So, if a certain margin is attained then bonuses go up; if a minimum margin is not hit, then bonus goes down. Modeling it out ensures you have a steady guide as you don’t want to keep shifting goals for your compensation program.
I later created an opportunity where if your performance attained a certain level you could start to participate in the annuity that you built. This excited the team as they knew they were in a company that had a long-term goal and understood if they grew the profit to a certain level, they reaped those rewards. This annuity was available for as long as you worked in the organization. Once we got it going, it increased the longevity in our relationship with team members and we had few resignations. It was another win-win scenario for everyone.
DISCOUNTED STOCK OWNERSHIP
I’ve always liked the idea of a discounted stock approach; where an individual earns the right to invest in the company based on their contribution and how long they have been with the organization. At Banker’s Mutual, I gave my top executives, a large discount to buy into the company. We were in the lending business and our loan committee each made lending decisions. I therefore decided I wanted my top executives, who were the members of the loan committee to share in the risk of our loan portfolios.
I therefore modeled it out and created an opportunity for them to buy into ownership at a 70% discount. Therefore, if a share was $1, they could buy it at 30 cents. At that point, they had been with the company for about 10 years and were critical to its growth, it therefore made sense and was right to bring them in at a discount. However, they had to pay the 30% with their own money. Their contribution to buying their ownership piece became as valuable to them as my share of the company was to me. When it then came to making decisions on loans, their perspective changed as their future and investment was factored in.
ACTION STEPS
When it comes to your organization here are a few questions to consider:
- Does everyone on your team participate in the success you achieve together?
- How do you avoid situations where some members are winning, and others are losing?
- Are there scenarios you can think of where the company won, and team members lost? Or vice versa?
I’ve found that when you look for the win-win scenario, it pushes everyone to pursue the same goal. When you are on different sides, it becomes harder to keep everyone focused and united.
Consider how you can create a win-win environment for your team by building a bonus structure that rewards every individual for their participation, sacrifice and service in advancing the company’s business plan. Money does not need to be a main motivator, but everyone appreciates being acknowledged and rewarded for their service. It’s not only the right thing to do, but the wise thing to do too.
What are your thoughts on this topic? Please share them with us in the comments section and help others learn too.
