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Keeping Your Balance: Driving organizational change with incentive compensation

Mark J. Kovaleski

Mark J. Kovaleski

I recently returned from a conference that focused on driving organizational change. A healthy debate ensued discussing if individual behavioral change could occur without a change in compensation methodology. There were many varied and conflicting opinions on this topic, backed up with actual stories that demonstrated the resounding successes and absolute failures of implementing such a system.

I firmly believe that compensation will not make a disgruntled employee satisfied, but financially rewarding a tangible action that leads to increased firm efficiencies or profitability will turn a good employee into a great one.

Traditional methods of compensation including base salaries and seniority pay are failing to motivate and retain top performing employees. Key employees are demanding a structure that pays for performance and productivity. Some form of performance-related pay system can accomplish many goals. A well-designed incentive compensation program can increase productivity and profitability, encourage flexibility and teamwork, and serve as a vehicle for organizational change.

It has been well-researched that compensation is not the most important factor in job satisfaction. However, according to a recent survey, 86 percent of respondents polled agree with the statement: “The kind of work I like is one that pays top salary for top performance.” An effective incentive compensation system teamed with good management and leadership is the recipe for satisfied and motivated employees. So, what are the ingredients for an effective compensation system?

In order for an incentive compensation program to be effective, it must have the acceptance of the employees. The most effective way to construct an incentive compensation system is to involve the employees themselves in the formulation of the plan. If the plan is to be successful this is critical. A system designed by top management without employee participation is destined for failure. Other aspects of an effective compensation system include the following:

• Goals must be readily communicated, understandable and achievable.

• Reward should relate directly to performance.

• Reward should be measured on all aspects of job responsibilities.

• Reward should be easily measurable.

• Reward should be significant.

An incentive compensation program is not easy to construct or implement. It is difficult to tailor to the organization as a whole while remaining fair and consistent to all employees. Other difficulties involve developing a system to measure quantifiable goals of assessing employees which are free of subjectivity and bias. However, the well-thought out plan does not discriminate between individual contributions and the success of the team.

A reward system or incentive compensation system is not a panacea. The system itself will not be able to motivate and retain key employees or drive organizational change. However, a well-designed incentive compensation system can be the foundation for motivated successful employees that understand and can contribute to the long-term success of your organization.

In most organizations, the move to an incentive compensation program is a significant change in structure and in the management philosophy of the firm. However, Teddy Roosevelt summed it up the best,

“In any moment of decision, the best thing you can do is the right thing. The worst thing you can do is nothing.”

Compensation is only one part of a well-designed benefits package. It helps with employee retention but is not more important than creating a proper firm culture and challenging employees to continually strive for excellence. However, including incentive compensation elements in your benefits package can indeed drive organizational change. Finally, the program must align with the core values of the firm to be successful.

Mark J. Kovaleski, CPA, is a partner with Mengel, Metzger, Barr & Co. LLP. He can be reached at Mkovaleski@mmb-co.com.