Common mistakes

The 6 most common mistakes companies make with incentive plans...
...and what to do to avoid them

Attracting, motivating and retaining key staff is a challenge for every business. Incentive plans can play a big part in achieving that aim, but many privately held companies shy away from using incentives, wary of experimenting with something as sensitive as pay.

But with care, a powerful and highly attractive incentive scheme can be designed for managers of privately held companies; one that focuses attention on sustained gains in the value of the business, while offering meaningful, competitive rewards for successful mangers.

Let's look at some of the most common mistakes that companies make in approaching the question of incentives, before looking at what can be done to develop an ownership like reward plan, without the complexity of issuing shares.

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Understanding modern remuneration practice

To discuss how incentives work best, we need a shared terminology and an understanding of modern remuneration practice

Mistake #1: No incentive plan

No incentive plan means higher fixed costs, a risk-adverse culture and resistance to change

Mistake #2: Bonuses based purely on the owner’s judgement

Discretionary bonuses are simple, but they tend to drive up costs and create division amongst managers

Mistake #3: Bonuses based on performance against budget

Tying bonuses to budget is one of the most dangerous mistakes owners can make

Mistake #4: All or nothing

All or nothing bonuses amplify the problems created by tying rewards to budget

Mistake #5: Payments made in full in one year

Paying for performance at the end of the year increases risks for owners

Mistake #6: The wrong measures

What gets measured gets managed, especially if it's tied to bonuses

What to do? An incentive plan that pays for sustained gains in the value of the company

What are the key elements of an ownership-like reward program?

Fix #1: Reward sustained improvements in profitability, measured the right way

Put a price on shareholder capital used to fund the business

Fix #2: Make every dollar of profit worth the same to managers

An ownership like incentive plan has an ownership like payoff profile

Fix 3: Ensure the budget plays no part in determining rewards

Ambitious plans should not come at the cost of lower rewards for managers

Fix #4: Only pay out if performance is sustained

A simple mechanism can be put in place to ensure only sustained gains are rewarded

Fix #5: Make the rewards on offer meaningful

A well designed incentive program allows owners to safely offer rewards that can compete even with public companies

A case study: The bicycle warehouse

A detailed case study shows how a carefully constructed incentive program can drive an ownership mindset

Common mistakes

The 6 most common mistakes companies make with incentive plans... ...and what to do to avoid them

The 6 most common mistakes companies make with incentive plans...
...and what to do to avoid them