Management Reporting: How To Align Incentives With Results

Incentivizing your employees to execute on your strategy can either bring the strategy to life or kill it rapidly.

Ted, Founder and Managing Partner at ClearPoint, has over 25 years of experience working with organizations to improve their performance management and strategy execution processes.

Your goal is to align incentives with results across your organization. So, you simply define your strategy, incentivize your staff to pay attention and contribute to that strategy, and achieve great results! Done deal, right?

Well… not always. There is a dangerous other version of this management reporting story, which looks something like this:

You define your strategy, you incentivize your staff to improve measures, the staff gets paid a great deal of bonus money, and your organization doesn’t achieve any desirable results. (Or worse, a scandal is uncovered years later: employees were gaming the system in their favor from day one!)

If you’d rather journey down the path toward the former (and stay safely away from the latter), consider the following precautions.

Management Reporting: How To Align Incentives With Results

1. Limit the number of measures you compensate for.

A typical strategic plan has 15-25 measures associated with it—but you should limit compensation to no more than 10 of those measures. For example, if you used all 25 of your measures for incentive, it would be difficult for employees to stay motivated to meet all 25.

But if you limit that number to 10 measures and then add a different weight to each based on criticality, your employees are more likely to act! For example, your most critical strategic measure could have a weight of 25%, while a less critical measure could have a weight of 5%.

2. Avoid measures that can be gamed.

Consider this cautionary management reporting tale: A call center decides it wants to incentivize its employees to take more phone calls throughout the day—those employees then figure out that they can simply answer the phone as rapidly as possible in order to meet their incentives—without solving any customer issues.

To avoid a situation like this, you’ll want to have more sophisticated measures that consider how some employees may try to game the system in their favor. In this example, the call center may consider incentivizing a percentage of customer calls that are resolved the first time rather than simply the number of phone calls taken.

3. Ensure you have a control system in place.

Another way to ensure that your incentives program can’t be manipulated is to have a control system in place. For example, a sales team may count the product they’ve pushed to a middleman as a sale, or teachers in a school district may alter test results in order to get larger bonuses. In order to avoid situations like this, you need to have an audit or control system in place.

Using the example in #2, if your call center employees are getting paid for the number of customer conversations that are resolved during the first call, you may want to record and randomly sample those calls regularly to ensure the system is running smoothly.

4. Set reasonable targets for your measures.

If your targets are too low, then they are easy to achieve without much effort. If the target is too high, it may not be motivating. So it’s critical to ensure every target is reasonable and understand that “reasonable” may differ based on each measure.

For example, improving the number of widgets that your company can produce by 10%-20% may be reasonable—but improving your reliability index (which is already extremely high) by 10%-20% may be simply impossible. If you’re unsure of what’s realistic, look at industry standards for benchmarking ideas.

5. Consider a trigger mechanism for funding incentives.

Some organizations pay out large bonuses during bad financial years. One way to avoid this is to set a trigger around one or two financial measures. If these targets are not hit, then no bonuses are paid. For example, you may determine the company needs to make a net income of at least a certain dollar amount in order to pay out bonuses. The bonuses would then be paid based on the achievement of the 5-10 incentivized measures against their targets.

6. Consider how much a bonus will affect total compensation and set the achievability appropriately.

If you want your bonuses to truly be considered bonuses, they should be at least moderately difficult to achieve and should be indicative of extraordinary results. But if your bonus structure represents 25% or more of your employee’s total compensation, then the targets should be more reasonable. At this level, bonuses would be considered more of an expectation than an exception.

In Conclusion

This management reporting tale may seem overly cautionary—but it is meant to be! You need to be very careful when you’re setting your incentives to ensure that they actually drive toward positive strategic results.

But do keep in mind that, when implemented properly, extra compensation is one of the best ways to get people in your company to pay attention to the strategy and the measures you want them to focus on. Many organizations claim their strategy only came to life after they aligned incentives with strategic results! Use the tips above to get you on the right path from day one.

We’ve also written extensively on how to evaluate goals and measures, which could help you design your compensation program correctly from the start. Download The Measure & Goal Evaluation Toolkit today.

Management Reporting: How To Align Incentives With Results