The Sharpening Stone – The Right Stuff: Elements of a Well-Designed Incentive Plan

When I was a boy, my dream was to be a pilot, and I was enamored with flying and outer space.  In fact, one of my favorite movies growing up was, “The Right Stuff”, which chronicled the stories of American test pilots like Chuck Yeager and astronauts like Alan Shepherd who put their lives on the line to make history.

Today, more than ever, you need to consider what the “right stuff” is if you want your employees to think more like owners.  In his book, “Ownership Thinking”, the author, Brad Hams, states that there are four components to Ownership, or “Right Stuff”, Thinking:

  • The Right People
  • The Right Education
  • The Right Measures
  • And The Right Incentives

When it comes to keys to developing the “Right Incentives” for your organization, the most important imperative is that the incentive plan be “self-funding”.  In other words – the payout to employees needs to be funded by the additional revenue or efficiencies that benefit the organization.

The incentive plan is meant to improve the financial performance of the company and to shape employee behavior.  Incentives should never be paid out if performance doesn’t warrant them.  An incentive plan is an opportunity to create more personal wealth, and it is not to be considered something they are “entitled to”.  Providing clarity around this to your employees is an essential component.

Here are other key elements that a well-designed incentive plan includes:

  • The plan must have perceived value by the employee; a good starting point would be 5% of wages in order to be meaningful.
  • Start with targets that are based on the performance of the entire organization, not individual departments. “One Team One Goal” promotes teamwork and engagement of all employees. While team incentives are preferred, individualized incentives are also appropriate for certain positions, such as sales.
  • The goals are understandable. For example, Profit Before Tax (PBT) is easy to understand, and every employee in the organization can impact PBT in one way or another.
  • The goals are a stretch, and employees need to believe they are attainable.
  • And finally, the plan clearly aligns employee behavior with the financial, operational, and strategic objectives of the business. What gets measured gets worked on!

Keep your incentive plan as simple and understandable as possible, and by designing these elements into your plan, you will be well on your way to “Right Stuff” thinking! 

We would welcome the opportunity to help you design an incentive plan that works for your organization.

About the Author: Steve Erb

Steve is a graduate of Purdue University where he received his Bachelor’s degree in Mathematics / Statistics, and Villanova University, where he received his MBA. Steve’s career has included senior leadership positions with two Fortune500 companies in Procurement, Logistics, Supply Chain, and Operations. Steve also built out the Organizational Development/HR department for a software technology firm and was a key part of seven (7) acquisitions over a 2-year period; as well as developing a successful compensation strategy and structure.

Steve’s expertise lies in developing operations strategies that eliminate redundancies; streamline processes/systems; and deliver productivity, quality, and efficiency gains. Steve has a proven reputation for caring for employees and teams, resulting in an overriding “Servant Leadership” mentality that transforms company cultures and creates a sense of employee engagement and accountability. Steve is also known for his change management expertise and ability to gain credibility to align performance drivers, customer expectations, and initiate continuous improvement across multi-site operations.

The Sharpening Stone

The Sharpening Stone is a series of short videos from True Edge designed to sharpen leaders and their organizations.

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