Wouldn't it be nice to have employees looking for more business to handle, or helping to innovate to permit more work to be accomplished without the addition of staff? An Incentive Compensation Program (ICP) accomplishes this goal — but it takes a few years of education to teach the employees that this is really as simple as it sounds. Al Diamond offers tips on how you can accomplish this.
An Incentive Compensation Program (ICP) can remove the subjectivity from the process of increasing compensation for performance. ICPs are usually constructed based on advances in productivity (revenue per employee) combined with department and/or agency profitability. If the individual manages a larger book of business (i.e., service employees) or manages their function for a larger client base (i.e. administrative employees) while their department and/or the agency maintains appropriate profit levels, raises are automatic and can actually be tracked by the employees, themselves.
If an individual is more productive and if the department and/or the agency is profitable, that individual shares in this success through salary adjustments corresponding to the productivity increase.
The “Merit Raise” system in which we have been raised is often less concerned with merit than with management's perception of an employee, combined with the frank realities of budgetary limitations. A variety of rating systems have been developed to establish some form of objective criteria under which the merit system can operate. Unfortunately, those very numerical rating systems must be based on a manager's estimates of employee performance.
Because agency growth (overall productivity) and profit predetermine the amount available for raises, the ICP is firmly based in budgets. A specified percentage of revenue is predetermined to be the total staff compensation level. 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 being given. Managers can't forsake their duty to evaluate employee performance. The manager's job is to identify an employee's weaknesses and correct them through a development plan and to help employees further develop their careers to make them more productive for themselves and for the agency.
Whether or not you choose to pursue ICPs in your business, the key to employee development and retention lies in a combination of equitable compensation, fair evaluation, and genuine appreciation for the efforts made by the staff. Please understand that your actions, not your words, reflect your feelings. Some managers express appreciation verbally, then publicly criticize or demean employees. Employees recognize that managers' actions truly reflect their feelings.
Compensation can be fair and equitable only if the agency has the revenue and profit to afford raises and if the employees understand the ingredients that result in their pay raises. If they believe that their raises are determined subjectively and that management is more concerned with enhanced profit than with fairly paid employees, they'll view all raises with suspicion and won't accept any evaluation as an honest review of their performance.
In the past, all evaluations have been tied to pay raises. Management couldn't 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 the agent because it appears that there's always enough funding for the agent's discretionary expenditures.
One of the reasons for developing the ICP concept was to de-mystify the compensation game. Employees monitor their own progress and the agency should provide further input on its profitability throughout the year. If there's no growth or profit, the employees themselves can identify the reasons for lower raises than desired.
It's essential to separate evaluations from pay raises. As long as evaluations are done only when pay raises are due, the employee hears whatever critique is being offered with an ear that's listening for what the evaluation means to their pay raise. If you determine compensation advances by objective means, you can use evaluations for their intended purpose: To evaluate historical performance and to further develop the employee's career. We suggest these changes to evaluation programs:
- Evaluate three or more times each year (two, at a minimum). Employees don't want to hear what they're doing right or wrong once a year. They'd like to hear praise often and to hear criticism when it's used to help them, not attack them. Evaluations are also one of a manager's most important functions. We might be insurance professionals, but the most successful of us are also management professionals. Just as you didn't 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, not a project. The process of evaluation should include 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 an employee is responsible in their job and the measurements of success for each. The process also includes a development program that both attacks any weaknesses uncovered and determines the development path to further 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 success measures of each, and a place to evaluate performance in each area. Both the manager and the employee should complete the form (independently) and compare and discuss the results together.
- Critique — don't criticize. Most employees will be harder on themselves than will the manager. 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 has to do with them becoming better employees and is not connected to pay raises.
- More important than the historical evaluation is the development plan. Develop another form for this tool. The form should identify areas of perceived weakness and areas of desired development. After the historical evaluation, both the manager and the employee should take the form and complete it individually. Make the shared results a basis for future evaluation. The development plan to which both employee and manager agree must be implemented between this evaluation and the next. For this reason, evaluation development plans run between three and six months long (depending on how often you evaluate).
The creation of non-threatening evaluation systems and objective compensation programs will differentiate the exceptional agency from those who experience unexpected and frequent turnover. The excuse might be that the employee has moved for money. The reality is that the departed employee did not feel that their former employer was fair. That perception, whether grounded in reality or not, can be clarified through an ICP and Employee Evaluation Program.