An effective Incentive Compensation Program will benefit your staff - and your agency.
An Incentive Compensation Program (ICP) is designed to remove the subjectivity from the process of increasing compensation for performance. We have written and assisted many ICPs and recommend that you contact Agency Consulting Group, Inc. should you want to construct one for your agency.
The construction of ICPs is typically based on advances in productivity (revenue per employee) combined with department and/or agency profitability. If the individual manages a larger book of business (service employees) or manages his or her function for a larger client base (for instance, administrative employees) while the department and/or the agency maintains appropriate profit levels, raises are automatic and can actually be tracked by the employees themselves. Wouldn't it be nice to have employees looking for more business to handle, or coming up with innovations to permit more work to be accomplished without the addition of staff? An ICP accomplishes that goal-but it takes a few years of education to teach the employees that this is really as simple as it sounds. If an individual is more productive and the department and/or agency is profitable, that individual shares in the success through salary adjustments corresponding to the productivity increase.
The system of merit raises in which most of us have worked is often less concerned with merit than with a combination of management's perception of an employee and the frank realities of the budget. Many rating systems have been developed to establish some form of objective criteria under which the merit system is to operate. Unfortunately, those very numerical rating systems must be based on managers' estimates of employee performance.
The ICP is firmly based in budgets because agency growth (overall productivity) and agency profit predetermine the amount available for raises. A specified percentage of revenue is predetermined to be the total staff compensation level. The employees earn raises by virtue of their productivity gains within the budgetary limits. The ICP also avoids the subjectivity of traditional merit-raise programs. Evaluations become tools for employee development, rather than the rationale for the level of raise given. The manager can't forsake the duty to evaluate employees' performance. His or her job is to identify an employee's weaknesses and correct them through a development plan, and to assist employees to develop their careers further to make them more productive for themselves and the agency.
Whether or not you choose to pursue an ICP in your business, the key to employee development and retention lies in fair and equitable compensation, fair and equitable evaluation, and genuine appreciation for the staff's efforts. Remember, appreciation is reflected by your actions, not your words. Some managers verbally express appreciation and then publicly criticize or demean employees. The employees know that managers' actions reflect their true feelings.
Compensation can be fair only if the agency has the profits to afford raises and if the employees understand the ingredients that go to make up their pay raise. If they believe that their raises are determined subjectively and that management is more concerned with enhanced profit than with fairly paid employees, no raise will be viewed without suspicion and no performance evaluation will be accepted as honest. In the past, all evaluations have been tied to pay raises. Management could not provide a glowing evaluation and a meager pay raise without using the agency's poor financial condition as the reason. Most of the time, employees simply don't believe this excuse because there always seems to be funding available for the agent's discretionary expenditures.
One of the reasons for developing an ICP is to demystify the compensation game. The employees themselves monitor their own progress, and the agency should provide further input regarding its profitability throughout the year. If there's no growth or the agency is not profitable, they can identify the reasons for lower raises than desired.
Evaluations must be separated from pay raises. As long as evaluations are done only when pay raises are due, the employee listens to whatever critique is being offered with an ear to the pay raise. If compensation advances are determined by objective means, evaluations can be used for the purpose for which they were created - to assess performance and develop the employee's career further. I recommend the following changes to evaluation programs:
- Evaluate three or more times each year (twice at a minimum). Employees don't want to hear what they're doing right or wrong once each year. They would like to hear praise often and to hear criticism when it can help them rather than attack them. Evaluations are also one of a manager's most important roles. Managers may be insurance professionals, but the most successful are also management professionals. Just as you did not learn insurance easily, quickly, or haphazardly, neither can you learn how to be a manager quickly, easily or haphazardly. Most managers feel uncomfortable evaluating performance because it's an event, rather than a process, so:
- Make evaluations a process. This includes an analysis of historical performance (since the last evaluation) in accordance with the employee's job description. The job description should list all major activities for which the employee is responsible in his or her job and the measurements of success for each one. The process also includes a development program that attacks any weaknesses uncovered and determines the development path to strengthen the employee in the future.
- Make evaluations a shared process. The best evaluations provide a form that includes the points of the job description, the measure of success for each one, and a place to evaluate performance in each area. The manager and the employee should each complete the form independently and compare the results together.
- Critique, don't criticize. Most employees are harder on themselves than the manager will be. Your job is to critique their performance and help them improve soft spots and further develop strong areas. Remember that this is a development exercise; that is, it's about helping them to become better employees, not about pay raises.
- Recognize that the development plan is more important than the historical evaluation. Another form should be developed for this tool. The form should identify areas of perceived weakness and desired development. After the historical evaluation, the manager and the employee should complete the form individually. The results should be shared and serve as the basis for the next evaluation, by which time the development plan should have been implemented. For this reason, development plans are between three and six months long, depending on how often you evaluate.
Non-threatening evaluation systems and objective compensation programs distinguish the exceptional business from the ones that experience frequent turnover. Employees' excuses may be that they're leaving for more money, but the reality is that they don't feel that their employer is fair. That perception, whether true or not, can be clarified through the auspices of an ICP and Employee Evaluation Program.