Wouldn't it be great if you could quantify each employee's performance before handing out money? Some entrepreneurs try to get a handle on how much individuals are contributing to the business -- as well as encouraging increased employee performance -- by developing incentive pay plans that vary by job category or department.

Take the case of Career TEAM, a fast-growing Hamden, Conn., company that reported $4 million in 1998 revenues. CEO Christopher Kuselias sets quantitative goals for every member of his 25-person staff. But at Career TEAM, whose business consists of placing welfare recipients in jobs and then monitoring their progress in those jobs, each employee's goals include individual, departmental, and companywide measures. That mix, Kuselias says, helps mitigate the "me first" urge that can accompany individual incentives; in that way, he hopes to encourage employees to add value to the entire company.

Kuselias says that Career TEAM receives funding based on its success at reaching three benchmarks: the number of welfare recipients who complete the company's training programs, the number who are placed in jobs, and the number who stay on those jobs six months. "We only get paid when someone is successful," he says. So Kuselias uses those three benchmarks in his incentive pay plan, too. Typically, he says, about 70% of an employee's incentive pay will be based on the benchmark he or she influences the most. For example, the incentive pay of an employee involved in teaching the training program will be based primarily on the training completion statistics. To encourage interdepartmental cooperation, Kuselias bases the remainder of the employee's incentive pay package on the other two benchmark measurements.

However, compensation systems of this type rarely remain static. At In-Seitz, a 40-employee communication agency with offices in Rochester, N.Y., and Atlanta, CEO Charles Engler has been adjusting his incentive compensation system periodically since its inception in 1989. At that time, Engler switched from an overtime pay system to profit sharing, to stop the company from losing money. "We had to change to a system that rewarded people for making money, so the company would make money," Engler recalls.

Engler has refined his system so that different departments have different performance measurements. For example, Engler measures the time it takes his computer support staff to respond to requests for repairs -- as well as overall system downtime. Meanwhile, production people are evaluated on a combination of their own productivity, the profitability of the projects they work on, and customer satisfaction measurements. Engler's overall aim? To tie employees' compensation as closely as possible to what makes the company profitable.

"If you refine the desire to know how well people are performing, you are really trying to measure the amount of money they generate for the company. It is desirable to know this so that you can reward and encourage people to do more of what makes the company money," he notes. "Thus the company should make even more money."

One caveat: any type of incentive pay plan has perils as well as potential. Such plans are more likely to succeed if:

  • They're explained properly. Jerry McAdams, a national practice leader of Watson Wyatt Worldwide and the author of The Reward Plan Advantage, suggests that you focus as much on explaining andimplementing your incentive pay system as you do on designing it. "Research has shown that the more you communicate with and engage employees, the less money you'll need to have in terms of payout," he says. "A poorly designed plan well implemented will always do better than a well-designed plan poorly implemented."
  • They're farsighted. "Watch out what you reinforce," McAdams notes. "You're likely to get it." Designed unwisely, incentive systems can encourage employees to be penny-wise and pound-foolish. For example, if an employee's goals focus only on cutting costs, he or she may ignore opportunities that build value yet cost money.
  • They have targets that change regularly. Every incentive plan, McAdams says, should be reexamined every year as part of your business strategy. "The longer you keep it the same, the more it becomes perceived as an entitlement," he says. However, changes while an incentive program is in progress undermine trust in the system. As a result, it makes sense to let employees know from the start when goals will change.
  • They're clear, not confusing. Measure whatever business measures you want, suggests McAdams, but base the incentive pay employees receive on no more than three to four numbers. That's all most people can focus on effectively.