Plain and Simple: Bright Business Insights April 2016 | Page 2

NOT A ONE-SIZE-FITS-ALL SOLUTION

The Pros and Cons to Incentive Compensation Plans
“How can I remain competitive?” This is one of the questions we
frequently hear from business owners in our area. Since the unemployment rate in most of Ohio is lower than the national average,
business owners are seeing the pool of available workers quickly
drying up. As a result, they are looking at their competition to find
quality employees to grow their business. Now more than ever
it’s critical for businesses to remain competitive in attracting and
retaining good employees.
For various reasons, many businesses within our community are
unable to provide benefits, such as health insurance coverage and
retirement savings plans, to their employees. So they have to get
creative in how they attract and retain their employees. One solution businesses have been considering is offering incentive compensation plans. Are you considering this approach? If so, it’s important to weigh the pros and cons to such a plan to determine if
it’s the route you want to take.

What’s Really The Goal of Incentive Compensation?

When it comes to establishing an incentive compensation plan,
most business owners we’ve talked to simply want a way to maximize productivity from their employees and create greater efficiencies. They believe if they can get their business to perform
more efficient and effective, they essentially can pass along a percentage of those profits to their employees.
One major misconception and struggle we’re hearing from owners
is how to define the standards by which to incentivize their employees. Most feel that employees should be incentivized based
on what is generally considered the status quo today – employees
simply doing their jobs. However, in order for an incentive compensation plan to really be impactful on a company’s bottom line,
it should be based on an employee’s performance above and beyond what they were hired to accomplish in the first place.

The Pros and Cons

Before you commit to moving forward with an incentive compensation plan, consider the advantages and disadvantages. While it
may work for you, it could also backfire. Here’s a short list of
advantages as to why incentivizing your employees could work
for your business:
•

An incentive compensation plan based on an employee’s
performance (going above and beyond what is minimally expected) could keep your employees motivated to work and
maximize productivity.

•

As a result of maximizing productivity, an incentive compensation plan could help your business increase profits and
enable you to put a portion of those profits back in your employees’ pockets.

•

An incentive compensation plan could improve employee
morale and teamwork if you find that is an issue for your
business.

Now consider some of the disadvantages to incentive compensation plans:
•

If employees have certain time-bound goals that are tied to an
incentive compensation plan, this could hinder the quality of
work produced. Some may rush through their tasks and essentially produce or deliver a lower-quality product or service.
It’s important that if you choose to implement an incentive
compensation plan, you clearly layout employee goals that
align with the business goals. The goals need to be SMART
goals (Specific, Measurable, Attainable, Realistic and Timely).

•

An incentive compensation plan can be flat-out dangerous.
Depending on the type of industry you’re in, if employees are
rushing around to complete their tasks, accidents could happen. Accidents will not only hurt your employees, they could
hinder your business’s overall productivity and negatively impact your bottom line.

•

Despite whether you think an incentive compensation plan
will motivate your workforce, it may actually be demotivating for some employees. For example, what if an employee
is working as hard as they can, yet are still falling short of
meeting the requirements to benefit from the incentive? They
could become disengaged and, as a result, stop trying their
best. Again, this could negatively impact your business’s productivity and bottom line.

So, What’s The Solution?

There’s no one clear-cut solution for all businesses on this topic.
Some businesses may greatly benefit from establishing and implementing an incentive compensation plan. Others may be unknowingly or unintentionally setting themselves up for hard times
ahead. It all comes down to thoroughly evaluating your strategy
and SMART goals for creating such a plan.
If you’re interested in learning more about how an incentive compensation plan may or may not work for your business, give me a
call. Our team of business advisors is well-positioned to help you
evaluate and consider what approach could work for you as you
look to remain competitive in your industry.

by: Dustin Raber

CPA, CMP, Senior Manager
212 N. Washington St.
Millersburg, Ohio 44654
[phone]