Contractor Tip Of The Month: Which Plan Should You Choose, A Discretionary Bonus or Results Oriented Incentive Plan? Part 2

Words: Damian Lang

Which Plan Should You Choose: A Discretionary Bonus Or Results Oriented Incentive Plan? Part 2

Damian Lang

This is the second article of a two-part series. To read part one, go to EZG Manufacturing's Blog or read it here.  Like a struggling football team, if your incentive plan isn’t working properly, you could end up 0-16 for the year - or in the contracting world - unprofitable… and we all know that’s not where you want to end up. So today we’re going to talk about the secret to building a winning team by insuring your incentive plan has been designed and is working properly. Let’s start by answering the following question: Why can’t everyone earn the same amount, regardless of what they do to drive company results? I.e. wouldn’t equal earnings make us one big happy family? Many of you are probably nodding your heads yes, and I get that. But let me ask the question in another way: If your co-worker were to get up on Saturday morning and watch cartoons, while you prepared for a meeting or loaded a truck with the right equipment for Monday morning’s job, should he still make the same as you? What if this happened week after week after week? Would equal earnings still make for one big happy family? You’re probably not shaking your head yes to this one. Put another way, if top performers earned the same wage as average performers, there would be no incentive to become anything more than an average performer. Paying the same amount regardless of what each employee adds to the table breeds complacency by informing the employees that there isn’t a benefit in striving to become better. So in essence, equal pay offers a net effect of lower productivity across the board. And who wants that? Let’s pivot and explore how equality would work in the sports world. Every football player now gets paid the same wage, regardless of who plays the hardest or scores the most touchdowns. To ensure we get this right, we remove the end zones as getting to them would mean those who get there are better than those who do not. Sounds like a nail-biter, right? Would anyone watch football if the players put in just enough effort to get on the team and collect a paycheck? Or if the end result was predetermined as a tie before the game even began? In last month’s tip, I explained the differences between discretionary and results oriented incentive plans. This month, I plan to let you in on the secret to how to quickly assure your plan has been designed and is working properly. But before I do, I have a story to tell you. I have friend/client that I work with that just can’t get himself to let go of average performers - he’s just too nice of a guy to do so. We laugh and argue about it, but always end up at the same place as the conversation started. In fact, that’s where we’ve ended up year end, year out for the past several years. So with his tremendous heart, he continues to keep the average performers on staff. And not unsurprisingly, his business continues to perform average compared to the industry. Subsequently, this is how the average employees perform that he keeps on his team. And average for most businesses is somewhere between a loss, break even and a slight profit. It’s never top profits compared to the best in the industry. If you too don’t want to let these average performers go (or can’t get yourself to do so), that’s okay. Just know that keeping them on will likely keep your business in the same average spot it’s always been in. But that’s not what you’re after, right? We’re getting closer to that secret. But first, let's take a look at how the NFL actually works: At the end of every year, NFL coaches draft the best players they possibly can. They also pay the best existing players in the league more to come over to or remain on the team. Coaches know that if they pay star players the same as the rest (even though their abilities and work ethic is better than everyone else’s), he’s going to lose them. And without any star players, he also knows his team will most likely go 0-16. It’s the same for your business. So here’s the secret to know if your incentive plan is designed and working properly: As the leader of your business, you must constantly be drafting/finding the best players for your team. So it’s imperative at the end of every year that you list from top to bottom the most important people in your organization. Add their salary next to their names on the list, and then take the time to study the results. If salaries aren’t in line with the employee’s importance to company performance, you have a failed system. And adjustments to your incentive system are needed. Think of it this way, if your top performer is compensated like they are your number five player, animosity is sure to lurk its ugly head and infiltrate your organization. The result? You may end up 0-16. On the other hand, if pay matches the true performance from top to bottom and is based on how they perform (instead of who they are), you’re more likely to end up 16-0. So, where do you want to end up this year? Damian Lang owns and operates several companies in Ohio. He is the inventor of the Grout Hog-Grout Delivery System, Mud Hog mortar mixers, Hog Leg wall-bracing system, and several other labor-saving devices used in the construction industry. He is the author of the book called "RACE—Rewarding And Challenging Employees for Profits in Masonry." He writes for Masonry each month and consults with many of the leading contractors in the industry. 
About: Contractor Tip of the Month
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