Five Steps for Creating an Effective Incentive Plan

By Tony Boschetto, CPA, Director,  Business Advisory Services, Accounting Management Solutions

CliftonLarsonAllen recently completed a study to determine the prevalence of financial incentive plans in the healthcare industry and to determine what degree these plans impact organizational results.

With over 120 multi-site healthcare organizations taking part in the survey, 30 percent of executives indicated that they received incentive pay, which (on average) was approximately 15 percent of their base compensation.  The survey demonstrated a strong, positive correlation between incentive plans and how effectively the organization achieved its overall goals.

These results from the healthcare industry are relevant in other verticals as well and we have also found that strong incentive plans can translate to greater employee motivation and improved business results.

Developing a strong management incentive plan is critical to helping a Company achieve its financial results.   Equally as important, the ability to attract, reward and retain management is critical to enhancing the value of your business for future transition.  A buyer needs to know that the accumulated knowledge of its most important team members (itself a valuable commodity) won’t walk out the door after purchase.

Not all compensation plans are created equal.  In order to maximize effectiveness, your plan needs to be carefully aligned with the company goals and have the right mechanisms to keep employees motivated and accountable.

Here are five steps to building an effective compensation plan for your company:

Step 1.
Develop a business plan that includes a clear vision, mission and strategy as well as financial models. A well planned roadmap is the first step in any successful journey.  Most importantly,  have management involved in the strategic planning and share information with the team.

Step 2.
Create individual goals for the executive team that align with the company’s vision, financial goals and operational objectives. Sharing financial information with management can be a substantial cultural change for many privately held businesses. However, research indicates that companies willing to share financial and operational performance with management and key resources consistently achieve better results.

Step 3.
Incorporate financial and management reporting systems that enable you to share information, track results and report success. Use systems that provide timely, accurate data. When in doubt, keep it simple.

Step 4.
Establish both short-term bonus plans and long-term incentive plans that are aligned with corporate and individual goals. Long-term compensation plans will align resources with the long-term success of the company are excellent tools for increasing employee retention during times of transition.   Cash-Based long term compensation as well as Stock-Like compensation in the form of Stock Appreciate Rights (SARS) or Synthetic Equity are all good options for privately held business owners.

Step 5.
Track results and maintain accountability. An effective management reporting system should also include leading key performance indicators that allow you to monitor activities that impact future performance as well as tracking actual results.

Conclusion:

Many privately held business owners are the back bone of their organization and are critical to its success.  However, business owners who can develop management talent are able to take the business to the next level and enhance the overall value and transferability of the business.