Bonus Plan Simplification

Compensation plans are one of the most effective forms of communication ever invented. Generally, if you clearly tell someone what you want accomplished—and tie a reward or recognition to the outcome—they will understand what you are asking them to do.

While this seems obvious, we have found that companies often fail to use or design their compensation/bonus plans to be sharp communication tools. This is usually true because bonus plans may not be clear as to what is expected, or the key message or priority gets lost in a forest of less-important messages. To help avoid these common problems, let me outline a few principles we have learned for designing simple and on-message pay plans.

Be brutally direct in stating your expectations—if you want your sales executive to grow revenue by 20% over last year, tell them that (and only that) and pay them accordingly if those results are achieved or exceeded.

Be concise and focus only upon priority outcomes—realistically, there are only a few key things that you can expect a sales professional or executive to accomplish in a year. For example, you may want an executive to successfully introduce a new product line in their business unit and grow unit profit by $250,000 over last year.

While there may be many other things you want to happen during the coming year, do not fall into the trap of trying to put them all into the executive’s pay plan. The extra 2-3 goals that often get added will become confusing to the participant and cloud the real priorities you have in mind. We often call overly-complex plans a “partridge-in-a-pear-tree” (PIAPT) design.

Avoid micro-managing with your incentive plan—tryto avoid the school of thinking that suggests that you must pay a sales representative or a key manager a bonus for everything you expect them to do or attempt (extreme version of the PIAPT design). I have seen as many as 6-8 small bonuses contained in an annual bonus plan with predictable results. The argument is that if you do not pay them to do something they will not do it. Examples of typical “non-bonus able” basic tasks or milestones would include: making sales calls, expense control, business planning, hitting deadlines or collaborating (well) with their peers.

For those considering a micro-management incentive plan, remember that there are at least three protections in place that obviate the need for such “coin-operated” pay techniques—

1. You pay them a salary to do all of this routine and daily stuff, in the first place;
2. If they are successful doing all of these underlying (and common-sense) tasks well, the proof should be in the end results; say improvement of sales or profits or the achievement of other strategic milestones; and
3. You have executives and managers to oversee that overall performance and activity of sales professionals or other key employees. There is no need to make the bonus plan a manager.

If all else fails, document your annual incentive or bonus plan in a single-page document (only allowing a second page for an example of payouts). This technique usually provides the desired bonus plan simplicity and clarity.

So follow the above principles and take the opportunity to make your bonus and incentive plan a highly-effective communication tool.

And, plant that pear tree somewhere else.

Wilkening & Company has assisted clients for near 25 years in the design of effective sales-force, manager and executive compensation arrangements. Over 100 plans have been implemented. Are you having a problem with your incentive or bonus plans? Give us a call, we likely have a solution.

The Affordable Care Act: A few months left to go

When we first discussed the impact of the Affordable Care Act and the future actions an employer should consider implementation was years away. Now it is a matter of months. And, ACA will impact both employer and employee.  

Within the last month or so, the White House has unilaterally decided to delay application of the insurance-coverage mandate for employers for at least another year (until 2105, we assume). It appears that (for the moment) an employer that fails to provide health insurance coverage for all full-time employees (if they have with 50 or more full-time employees will not yet incur a tax penalty for such lack-of-coverage until 2015. This temporary reprieve seems like good news, especially for smaller companies, but most executives and owners we speak with continue to plan and act as if that penalty is still due and payable in 2014. We believe this caution is a good course of action and generally a prudent use of 2014 to gain experience and monitor compliance.

On the other hand, the mandate for individuals to have health insurance who are not already (and adequately) covered or included in an employer-provided or other health insurance plan remains in place. Hence if an individual does not have health insurance in 2014, a penalty (assessed as a federal tax through the IRS) will be charged for all uncovered family members. These penalties will increase after 2014. This risk of penalty is particularly an issue with part-time employees. Of course, many uncovered employees may be eligible for governmental benefits to offset the cost of buying insurance—however sourced. Plus, there are a fistful of exemptions where penalties are not incurred.

It is likely that the majority of uncovered employees will be able to find low-cost or subsidized coverage or be exempted from the mandated penalties. But, some will incur this liability and the mere threat of this 2014 penalty is real to many part-timers.

For generations, employers have taken a lead role in providing health-care insurance to their employees through private or risk-pool insurance arrangements. As such, employees always have had an expectation that some health-care benefit might be provided. Sometimes it was, other times it was not (often in the case of part-time workers), but it was always a consideration in any employment arrangement. With ACA the federal government has forcefully put itself into the “deal” between the employer and employee. However, the relationship between employer and employees still remains strong and is primary.

Hence, we believe that it remains the employer’s responsibility to communicate with all employees (full- or part-time) regarding ACA and explain to each and all how it will affect them in the coming year. While some would say that it is the government’s job to do so, we all know this will not happen—other than a statement or two from the White House press room.

The ACA compliance landscape seems to be changing daily, and few can predict what will happen next. With regard to ACA compliance and penalties, we advise our readers to contact their tax advisor promptly and before year end for direction and advice.

But, your employees’ well-being and peace-of-mind are too important to be left to the agendas of a few politicians or bureaucrats. Make sure you inform and calm their ACA concerns directly and in person.
It is in your interest to do so. Arm yourself with the facts, and open an ACA dialogue with your employees. If you are waiting for the “final word” on ACA before you talk with employees, you may have a long wait. Reach out to your employees sooner than later.

Wilkening & Company has written a number of articles on the implications of ACA. If you go to our Search Our Site tool and type in “ACA.” It will link you to these previous articles. If we can help you navigate the through the requirements and implications of federal health-insurance legislation, or communicate change with you employees, do not hesitate to call or write.