Compensation Ideas – But Only If …

Incentives are powerful – but hard to get right.

If only business were that simple. The problem is we rarely want just one outcome. We need a balance: quality plus speed or doing what’s easy AND what’s hard.

This quote sums up the problem nicely:

True meritocracies produce amazing outcomes if they’re properly controlled, but they also create incentives for shortcuts. Especially if you’re promoting young, hungry people to take on super-aggressive targets and you make their compensation extremely variable. But how do you properly control things so people don’t take shortcuts?

Designing the incentives for your people is one of the most important things you do as a business owner. Incentives usually means pay; wages, bonuses etc. But it can also mean awards, promotions, recognition; anything that motivates people.

Here are some thoughts on the idea of incentives as well as my favorite structure that I call “But Only If …“

Incentives must be based on something a person can change.

Or more accurately, something a person believes they can affect. If you give a bonus based on the profit of the entire company, in a large company most people’s activities have little effect on that number so it won’t change their actions very much.

Here’s a “but only if…” twist. After Burger King was bought by 3G they put an incentive plan in place for workers at the head office. Variable pay was split evenly between the main company-wide target (17% EBITDA growth) and individual metrics. If a person’s numbers were less than half complete, they received no bonus at all, even if the business hit its goal.

The Calculation Must be Simple.

If the folks you’re trying to motivate can’t keep it in their heads, you’ve probably lost the power of the incentive. Most of the time when I’ve seen a bonus structure that requires a complicated spreadsheet it’s because the business owner is worried about giving away too much. Think through the edge cases beforehand so you can feel good about investing in your people. Make it simple. (Michael Girdley has a method for bonusing the CEOs of his holding company based on financial returns plus hitting objectives. He says it’s simple but seems complex to me.)

Compensate a Team for Teamwork

When Ken Iverson was running Nucor steel back in the 70s, production for each team was measured and bonused weekly. Their base pay was lower than the industry average but with bonuses each team member could make twice the industry standard. This tied their compensation to something that they could control and calculate simply. But they had to work as a team.

Measure Quality Objectively and Consistently

Numbers are easy to measure. But they can be a trap. If you only measure what’s easy, you’re likely to miss what’s important. The trick to measuring quality is to define it in ways that are consistent and mutually exclusive. You’ve probably been asked by a doctor or nurse how bad your pain is on a scale of 0 – 10. That’s pretty subjective. But here’s an explanation from Kaiser Permanente that makes it consistent.

• 0 = No pain.

• 1 = Pain is very mild, barely noticeable. Most of the time you don’t think about it.

• 2 = Minor pain. It’s annoying. You may have sharp pain now and then.

• 3 = Noticeable pain. It may distract you, but you can get used to it.

• 4 = Moderate pain. If you are involved in an activity, you’re able to ignore the pain for a while. But it is still distracting.

• 5 = Moderately strong pain. You can’t ignore it for more than a few minutes. But with effort you can still work or do some social activities.

• 6 = Moderately stronger pain. You avoid some of your normal daily activities. You have trouble concentrating.

• 7 = Strong pain. It keeps you from doing normal activities.

• 8 = Very strong pain. It’s hard to do anything at all.

• 9 = Pain that is very hard to bear. You can’t carry on a conversation.

• 10 = Worst pain possible.

This is still subjective (your #5 might be my #8) but now it’s consistent. Define your quality that way.

What About the NPS Score?

Many think the NPS score is a way to make quality objective. The idea is that by asking if someone would recommend your product “to a friend” you’ll get some emotional response baked into your numbers. It has its place, but it’s often used in the wrong context. I did a longer write up about it here. https://johnseiffer.substack.com/p/why-i-hate-the-nps-score-for-employee. My main suggestion is if you’re going to use it, follow up with a second question “Why did you give that answer?“ and let people write as much as they want. Then ignore their numbers and read their thoughts.

The funniest response I heard was from someone who was asked the question about Microsoft Windows. They gave it a zero. Why? They said, “I don’t ever talk to my friends about computer operating systems.” If you can’t trust the data, you can’t trust the calculations you get from it.

Paired Indicators

This idea comes from Andy Grove. In his book “High Output Management,” he talks about the benefit of measuring two things that are contradictory so they balance out. Generally these are speed and quality. If something happens faster, quality is likely to suffer. If quality is high, it might be slow.

Speed is easy to measure. Quality is trickier. But it can be done if you can make it concrete. Balancing the two is where “But Only If …” comes in handy.

But Only If … for salespeople.

I got this from a recruiting agency that specialized in temporary truck driver positions. Each opening had to be matched with a driver who had the proper certification and license. Each branch office was staffed by a salesperson and the problem was they needed that person to take care of repeat customers as well as open new accounts. The repeat jobs were easier, and they needed a way to reward salespeople for doing both without them just working easy accounts to hit their revenue numbers. Here’s what they came up with.

Salespeople only earned commission on new business – not on repeat accounts. But they also had a quota for how much repeat business was expected. The commission was earned on new accounts but only paid if the quota for repeat business was met that month.

But Only If … for Locomotive Engineers

At the ALL Railway in Brazil, an engineer’s driving could affect how much diesel the train used and diesel was the single largest cost in the company. But they didn’t want to incentivize unsafe driving. They installed computers onboard each train so they could rank drivers by fuel consumption. They called the competition the Diesel Cup. Top performers earned badges for their uniforms. Famous soccer players presented prizes at award ceremonies. The “but only if…” was that anyone who violated safety rules was disqualified from the competition. This is an example of the incentive being an award and recognition – not money.

In summary, I don’t disagree with Charlie Munger but putting the right incentive in place takes thought and creativity.

If you’d like to hear a coach’s perspective on your incentive ideas, I offer a free coaching session at https://john-3.youcanbook.me/