Using Variable Incentives

When you hear "Variable Incentive," do you think "Sales Department?" In the past, variable incentives have often been reserved for commissioned salespeople. Employers used them because it reduced the risk of having to pay for little or no results. At the same time, well structured incentives would motivate the salesman to make a little extra effort.

For the past couple years, most employees placed more importance on financial stability and preferred the predictability of a steady base pay. But as the economy moves ahead in the early stages of recovery, employers may find a win-win situation by adding a new twist to the old concept of offering variable incentives.

The big differences this time around are that variable incentives certainly don't have to be limited to sales departments, and they don't always have to be paid in the form of dollars. Every department has departmental goals. Providing incentives to reach those goals can improve retention rates and heighten employee motivation.

Offering variable incentives has been used effectively since ancient times. It may have had a different label then, but the idea behind rewarding each person according to what he has done capitalizes on human nature: Incentives become their own motivators. Variable incentives harness this trait in a way that allows an employer to use his payroll dollars more effectively.

How is that done in practical terms? You begin by identifying goals that you want to encourage. A PEO can often help with this. Some examples might be company-wide bonuses for profitability, on-time attendance awards, completion of extra training, meeting personal goals determined during evaluations, client satisfaction, on-schedule meeting of deadlines, or any other goal that is important to your business. Because many of these goals overlap, an employee can benefit from multiple incentives. The end result is expectant, motivated employees.

Is it Time to Fire Your Performance Appraisal System?

You probably have heard of the Law of Unintended Consequences. A classic example is seen in the early days of forestry management. When the US Forest Service was created in 1905, so much emphasis was put on the suppression of forest fires that biodiversity began to decrease due to fewer young forest habitats, species like lodgepole pine in the Rockies and long leaf pine in the South, both of which require intense heat for germination, became at risk, competition increased the stress on existing trees, and a build-up of debris in the forest's understory made fires more ferocious when they did break out. For three-quarters of a century, the "fix" was actually causing more problems than it solved.

Using old-style employee Performance Appraisal Systems can sometimes be like that. In an attempt to manage personnel more effectively, some workers lose their motivation, while the employees who believe they can do better elsewhere start to leave. If employees view performance appraisals as more office politics, then the unintended consequences of increased dissatisfaction and dropping retention rates are sure to follow.

It is in situations like this that using a PEO can be especially effective. When they act as your Human Resources department, they can conduct appropriate evaluations that minimize the politicking and will not disenfranchise your staff.

If your employee evaluation system still has all the inbred dread of a high school report card, then it is time to update and innovate. Your company's true benefit of an annual performance evaluation is not so much about knowing if an employee is doing what he is supposed to be doing—it should not take an annual evaluation to know that, as it is about learning if you are meeting the leadership and training needs of your employees.

An evaluation ought to be able to identify what management needs to do to improve, not inflict another round of regulation, as happened in the Forest Service. For years, scientific research that recognized fire as essential to ecosystems was ignored because of an ill-fitting congressional policy. Using a PEO can help your company avoid that kind of management mistake.

An annual Performance Appraisal is a check-up to see if the consequences of your management policies are the consequences that you intended. Are you realizing better retention rates and higher levels of employee motivation? Are you managing your office ecosystem to produce a thriving community of employees?