Does your business model drive your incentive comp plans?
Incentive Comp Plans Driven by Business Model
The traditional thought process is to decide how your business will make money and then develop incentive comp plans to encourage employees to act in a way that supports the business model. But that is not always the way things work in real life. Sometimes an incentive compensation plan that sounds great on paper ends up driving a very different set of behaviors than anticipated.
One business I worked with set up an incentive system to encourage profitable sales growth. Even the president was rewarded when the company grew sales and made more money. At least that is what the income statement said. However, the owners were not able to take more money out of the business. In fact they had to keep borrowing to support the increase in inventory that the company kept buying. Eventually the inventory was literally worth more than the whole business. The owners owed money to the bank and they could not take any more money out of the company. All because of an incentive system that was not what it first seemed to be.
A slight change in the incentive system to include the cost of inventory immediately changed behaviors at the company, brought the bank line down to zero, allowed the owners to take more money out of the company – and in the end – profits increased!
So, does your business model drive your incentive comp plans?