Rule 18: Incentive Budgets

The Incentive Budgeting Rule:  Back-Load Performance Incentive Budgets

Conventional wisdom says that performance incentive plans should include all workforce members, regardless of their longevity or experience.  On the face of it, “all-inclusiveness” seems to make sense. 

Experience, however, is teaching otherwise.  The reality, particularly in businesses with high-velocity Workforce Turnover, is that upwards of 30% to 40% of incentive compensation budgets are being wasted on workforce members who will not be working for the organization long enough to make a material difference on overall organization performance improvement.

The recommendation is to structure an overall recognition/incentive plan that motivates new workforce members to perform consistently at certain levels of success over their initial three months of employment, to then vest in the organization’s non-cash recognition program; then perform consistently at higher levels of success over the next three to six months of employment to then vest in the organization’s cash incentive program.  Longer term success can earn participation in equity-based performance incentive plans.

This performance achievement-based step-by-step vesting approach reallocates cash incentives from short-term, marginally contributing workforce members (at the “front-end” of their frequently brief tenure) to those who have shown sustained performance improvements over a longer-term, and earned their way into greater rewards. 

Does “back-loading” disproportionately larger “pay-offs” work as a performance motivator?  Just ask the Cub Scouts who became Boy Scouts, and then became Eagle Scouts.  Ask the MBA, Law or Medical School graduates if they earn more than if they’d stopped their education at high school, or college.  Ask the sales representatives that push performance to the next level because commissions are higher there.   

How much happier would your top performers be if you improved the pay-out potential of your incentive plan by 25% to 50% because you weren’t wasting money on short-term participants (and this reallocation doesn’t cost you any extra)?

“Back-loading” incentives works by making the program “richer” and more rewarding for the people who end up doing most of the substantive work, the “Engines of your Enterprise”: the 30% to 50% of your workforce that produce 80% to 90% of the desired results anyway. 

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>>> Rule 19