My Beliefs on Incentive Plans

Caveat. I’m not a compensation expert, nor do I want to be. I fear I might become too dogmatic on means and methods that do not lead to wisdom-based results if I were.

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Does Carrot and Stick Motivation Work?

What I’m about to write is controversial, but I will become vulnerable by stating incentive plans generally do not work as originally intended.

I am not stating that incentive plans do not work. They do. Several years ago, I worked with a growing professional services firm that used SPIFFS to wag the dog, my way of saying to control outcomes by getting their employees to behave in a manner to drive top-line sales.

The plan worked in the short term. However, their company culture was one of the worst I had ever experienced in my twenty-plus-year consulting career. Turnover was rampant in this company despite these SPIFFS that appeared to be working.

Let’s not forget every compensation expert’s favorite story told at workshops and seminars, the Wells Fargo cross-selling fiasco. Unfortunately, the incentive plan worked, but there were unintended consequences, which I’ll address later in this discussion.

A Little Science on What Motivates

Deci and Ryan are considered the pioneers of what motivates people. Their textbook is entitled Self-Determination Theory: Basic Psychological Needs in Motivation, Development, and Wellness. Dan Pink was standing on the shoulders of these researchers as he was writing his easy-to-understand book, Drive which I’ve been recommending to CEOs for years.

Based on the research of Deci and Ryan, I’m not 100% convinced that financial rewards motivate others to improve business results. Can there be a strong correlation between results and rewards? Certainly, but prove that the rewards drive the results.

The majority of CEOs I work with disagree with me. I’m okay with that. I leave the conversation by stating let’s not confuse correlation with causation. When CEOs see that their cash-based incentive plans work, I see correlation, not cause-and-effect. I see something differently.

I’ll use Arlan Alburo as an example. He’s one of the best CEOs I’ve ever worked with. Arlan, Jane, and Noel incorporate three cash-rewards programs in their growing business (one of which I helped to implement).

They provide these programs because they care about their employees. These cash-based reward plans are not about manipulation or mind control. Instead, Arlan, Jane, and Noel have a sharing and stewardship mindset. When the company is winning, everyone wins.

More importantly, the heart of the rewards program is education and continuous improvement. They are probably in the two percent of companies that can teach Shewhart tools and techniques in bettering the customer/patient experience.

In short, my number one mindset is that incentives are not about motivating the staff. I should probably add that I never use the word incentives. My default term is additional rewards above and beyond base pay. And those additional rewards are driven by the mindsets of the owners. They share these rewards because they want to.

My thinking on this topic is not for everyone. Arlan, Jane, and Noel have an abundance mindset. They don’t think twice about sharing profits. Owners with a scarcity mindset constantly fear and worry that business outcomes can go wrong. They will generally opt for the carrot-and-stick incentive plans. I’ll never call those people wrong. Instead, I’ll only observe the consequences of their actions.

The Ten Ideas on Rewards Programs

I’m already becoming wordy in this discussion. And since I fear this could become a 15,000-word article, I’ll share my ten points on compensation rewards (incentives) below.

1. There will never be a perfect compensation rewards program. In that case, don’t try to create the perfect plan. Keep making it better over the years.
2. When in doubt, keep the plan simple.
3. Even simple plans should incorporate the three bottom lines of ROAM (Return on Assets Managed – a concept taught exclusively for G3CFO clients).
4. Never forget the guiding principles of the 40-30-20-10 Rule™, which is about how profits are divided and foundational in long-term thinking.
5. All incentives can only be paid from one of three sources: current earnings, saved past earnings, and liquidity events. Accordingly, plan carefully and thoughtfully.
6. The most under-utilized tool for compensation planners is the driver-based business model. Use it to stress- and shock-test free cash flow and its ability to meet future financial obligations.
7. When it comes to compensation and rewards programs, be transparent.
8. Don’t forget the laws of human nature, the first concept that should be taught in any leadership school. Owners worry about the financial well-being of the business. Employees care about their own financial well-being. Strong leaders understand this disparity and find ways to bridge the gap.
9. My opinions apply to sales commissions, too. Jim McIngvale is the most famous furniture store owner ever. He stressed over his decision to kill sales commissions. When he pulled the plug on commissions, sales reps made more money, and customer service rose dramatically (Source: Always Think Big).
10. Finally, dream big. Bill Dickinson is one of the savviest CEOs I’ve ever served, and he’s created more millionaires in his business than any other I’ve known. Bill wants to create more. What’s your dream for every employee when thinking about reward systems in your business? I especially liked Bob Rosenberg’s dream for his team members who retired after twenty years of service. He wanted them to earn up to 65% of their recent average earnings.

The Core Values of Incentives and Rewards Programs

Most small businesses have core values that they live by. Every business that Jen Briggs works with has a well-crafted compensation philosophy.

Is it time to establish a set of core values or guiding principles around incentive or rewards programs?

You certainly do not need to follow my ideas. I could be way off in my thinking. My ideas happen to be my perspective on rewards programs, and those ideas started stacking over a 25-year time period.

How about putting your ideas on paper regarding incentives and rewards?

Postscript

Exactly two days after I published this post, I was impressed with the article David Sacks wrote on his substack entitled The Dark Side of Sales.

Similar to what I stated earlier, here is how Sacks ended his insightful article:

Incentives work powerfully well, perhaps in some cases a little too well. If you don’t inspect and supervise your sales practices carefully, you could find yourself unpleasantly surprised by some of the behaviors you end up incentivizing. If you establish and maintain an effective sales compliance regime, your incentive plans will drive healthy growth in your company. Fail to do so, however, and you will find undesirable behaviors growing as well.

David Sacks – The Dark Side of Sales, January 5, 2025.