One CEO set up an incentive plan to encourage staffers to control payroll costs.
Ever since Paul Silvis founded Restek, eight years ago, his controller has nagged him to control payroll costs. The Bellefonte, Pa., manufacturer of laboratory equipment has grown fast, and the temptation has been to solve every problem by hiring. To change that, Silvis worked up an incentive plan that encourages everyone to keep salary expectations realistic and find more efficient ways to work.
Guided by his company's history, Silvis set a ratio as a goal: payroll should not exceed 20% of sales. At the beginning of the year, Silvis sets aside 20% of the projected sales growth for growth in payroll. Managers project their hiring needs for the year and subtract the cost of those. Silvis sets aside another 1.5% of projected revenues for unanticipated hires. The remainder is what's available for raises in the following year; for 1994 that's 7% of expected sales. If Restek's payroll-to-sales ratio stays below 20%, the difference goes into the profit-sharing bonus pool; above 20%, the difference comes out.
Restek shares all numbers with employees so they know how much money is available. Silvis says, "Many companies just give raises without spelling out the rules, and that breeds mistrust. Our employees know managers aren't pulling these numbers out of their hats." So far he's seen only positive results: last year the key ratio dropped from 19.6% to 18%.
But no bonus plan works forever; the needs of companies (and workers) can quickly change. And specific incentive plans can make employees focus so tightly that they ignore their company's overall health.