INC.: There are obvious opportunities in manufacturing settings, but how might that apply to other kinds of businesses?
BLAISDELL: The approach lends itself to any business in which people work together to produce a tangible output. For example, in a financial-services organization or in the accounting department of any company, you may have thousands of transactions. Productivity, therefore, is critical. Incentives based on the volume of work or the quality of data entry would be an obvious thing to explore. You need to identify what's critical to the success of the business. I know of some younger companies that reward executives for meeting cash-flow goals. For them, that's the most important thing.
INC.: How quickly should you pull the plug when you find an incentive is having undesirable side effects?
BLAISDELL: My attitude is that you need to be willing to review, modify, and update anytime the business and the way you operate change. You might have new equipment, or you might have new products. If there's one thing we can say with certainty these days, it's that changes will continue to occur and will ultimately have an impact on your incentive plans. Even if you aren't aware of problems, every incentive plan should be reviewed annually. In fact, you may want to have sunset provisions in which plans automatically expire at the end of a year. Then you can see what you want to do for the coming period.
Remember, the whole idea here is to motivate people to change behavior and improve performance. If people aren't responding, you've got a problem. You need to figure out what's going on.
INC.: OK, say we're getting people to focus. Waste is down, results are looking better, but we're still losing money. Where do we find the money to pay the bonuses?
BLAISDELL: Well, payouts from some plans are driven by cost improvements -- gains in productivity, quality, or whatever. You share the gains with the people who achieve it.
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INC.: CEOs should dip into their pockets? Remember, this business is still in the red.
BLAISDELL: Yes, but you're still in operation, and you're spending less than you otherwise would. The incentive funds come from the reduced or avoided costs.
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INC.: We see what you're saying. But don't CEOs have problems with that?
BLAISDELL: If the goal is to operate more efficiently and employees have worked hard and achieved that, a lot of managers I've worked with are happy to pay out the money.
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INC.: Couldn't you create a threshold of profitability and say, "We won't pay out a dime until we earn X"?
BLAISDELL: Certainly. Cash profit-sharing incentive plans tie the organization and its employees together in shared success.
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INC.: What's the downside?
BLAISDELL: The downside is that employees may not see a direct relationship between their efforts and the financial success of the organization. They could do everything right, meet all the productivity goals you set, and receive nothing. That's a hard message for a manager to deliver. An alternative is to design a system in which the incentive opportunity is tempered by profitability but not totally eliminated.
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INC.: Say your business is slowing down or has already slowed down. Is this the time to think about some new incentives?
BLAISDELL: Depending on the circumstances, it could be an ideal time.
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INC.: How do you get started? What's the best way to pitch a new incentive system?
BLAISDELL: I'd start by not even focusing on pay and incentives. I'd start by communicating what the business needs are, what the challenges are, how you'll be organizing the business as a whole and the role of each work group, what types of performance you'll be looking for, how you'll measure it, and what steps people will need to take to bring this improvement about. After I'd gone through all that, I'd decide whether these changes are so critical to the success of the company that I'd be willing to tie pay to them. But I wouldn't talk about pay until I'd established what it is we're trying to accomplish and how best to make it happen.
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INC.: We've talked about company-wide incentives and incentives for smaller groups. When you're in the midst of a downturn, what kinds of things can you do for the managers you don't want to lose?
BLAISDELL: Some private companies set up long-term cash bonuses when they know they're not going to be paying an annual bonus. They tell managers they'll get X% of this year's pay later on -- assuming the company meets its performance goals over the next two or three years.
Beyond this, there's phantom stock. Usually, it means giving a manager appreciation rights on, for example, hypothetical stock shares based on book value or actual stock value over a period of time. In private companies, phantom stock has some real advantages over other kinds of equity arrangements, although it can create a significant cash obligation down the line. In general, my feeling is that these incentives will help to retain your key people only if they believe in what you are doing and feel committed to the business.
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INC.: So the CEO has to sell them on the future? How do you convince people that it will be worth their while to stick around?
BLAISDELL: The best way I know of is to infect them with your enthusiasm and conviction about the potential and future of the business. You need to reach out to your people and communicate your optimism and enlist their support. Motivated people are the strongest vehicle for improving performance that a manager has. You've got to be able to make the business tangible, to show people there really are customers out there who buy this product and who are the source of all revenue and potential for future growth.
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INC.: It's fine if you're feeling that way, but CEOs are people, too. What if they're feeling battered?
BLAISDELL: Mostly, I'm arguing for candor, for sharing the reality of the situation as they see it with the rest of the organization and talking about their ideas for improving things. People want to hear what the person at the top is thinking. Sharing concerns and ideas can be a very positive force.
If I were running a company, I'd also look around the organization for the people who are most positive about the future. Maybe the sales manager or a young engineer working on a new product line. I'd get them in front of employees and have them share what they see. Every organization has people who are feeling up about the future, who are making important inroads. When CEOs are feeling down, they should tap into those people.
The strongest investment a business owner can make is to tap the potential of the organization's people by communicating a vision of the future, enlisting everyone's support, and sharing in the success. *
