Performance incentives are powerful mechanisms for aligning your goals with the people in your company, and even with your supply chain partners. However, incentives can also destroy profits, create negative cash flow and hurt customer service. Some types of incentive pay are:
- Supply chain incentives
- Providing a pool of money to all supply chain partners for completing a major project such as a construction project or new product development
- Company incentives
- Growth in profit and cash flow shared based on a specific formula such as payout based on years of service or annual pay
- Team incentives
- Paying a bonus to the team based on its performance scorecard’s overall performance index
- Individual incentives
- Production: Allowing each direct labor person to determine his or her own hourly pay based on throughput hitting different performance thresholds
- Sales: Growth in gross profit based on delivered cost
Single Measure Incentive versus Blended Performance Scorecard Inventive
The best workplace incentive ideas base the financial reward on multiple performance measures, often found on a Balanced Performance Scorecard. Two examples of scorecards are one for an operations department and one for a sales department. The Operations Management Team is incented based on the Overall Performance Index (OPI) of its department. This bonus is paid out quarterly. Each Operations Manager and Supervisor has a maximum possible bonus. For example Supervisors may have a maximum bonus of $1000 per quarter. Given the department’s scorecard results (shown on the next page), they would receive 48% x $1000 = $480. Note that each measure is weighted differently, which creates more focus for Operations Management on the more highly weighted measures such as sales-per labor hour (labor productivity) and sales per material $ (material productivity).
Sales Representatives’ incentives are often a source of great controversy in companies, because sales reps are usually incented only by revenue. We suggest instead a blended approach, with Sales Representatives’ success measured by multiple metrics. In the Sales Scorecard below we measure revenue growth, growth of sales to existing customers (versus just selling to new customers), and how well a sales representative’s customers are paying their bills. Using the same formula as above, management could incent the sales reps with a maximum $10,000 quarterly bonus. Using this sales reps Overall Performance Index (OPI) of 63%, they would earn a $6300 quarterly bonus.