I’d like to introduce some form of performance related pay or incentivisation into the business. Any suggestions?

Saturday 01 March 2014
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A lot of people ask this question as either they want someone not to change or conversely someone to change.

Whilst the two circumstances are clear contradictions often the same solution is chosen with the broad principle being – “if you do this, then you’ll get more money”.  Dan Pink, who you can watch on www.ted.com, has written a very good book on his research on behavioural science studies conducted over the last 50 years which have shown that “if - then” financial rewards make people perform worse if the task being performed requires some outside the box thinking.  You’ll see what I mean literally if you watch the video!

As to your question, I’ll assume either you want to keep a high-performing well liked "Steve" due to the risk of clients, staff or both following him out the door if he left; or you want "Jason” to sort himself out and improve his sales volumes/operational performance.

A frequently chosen solution to keeping Steve is a profit share or share incentive scheme.  This makes sense as he’s likely senior within the business and you will want him to help manage the staff, control costs and care about the business almost as much as you do.

Profit shares are relatively simple to arrange and agree.  It can be harder making sure that Steve values the offer sufficiently for him not to still be better off leaving.  You may have to give up quite a large percentage of profits to make it worthwhile and that can be emotionally challenging.

The downside of pure profit shares is that they can encourage excessive risk taking or other forms of short-term thinking.  An example of short-termism is salesmen on commission who can damage a business’ reputation if they overpromise or are too pushy to hit sales target commission levels.

Whilst profit sharing is relatively straight forward, share transfer schemes are usually much more complex and you have to ask yourself whether or not they are worth the extra hassle and cost.  That comes down to the individual being offered the incentive and how much you want to lock them in and want them to feel part of the business.

Providing great staff with share transfer arrangements in a way where everybody wins makes a lot of sense as it more closely aligns everyone’s interests and can help keep them with the business for the long term.  A good way to do this is “growth shares” which Steve would only get if the company grows and if it’s done in the right way then you’re not giving away any of your value just sharing the growth.

There are lots of types of arrangement where either somebody gets something extra for staying for a period of time, or for some pre-agreed performance criteria or, most often, both.  So you can have a situation where Steve helps the business hit a profit target and then gets a percentage of the business which he can only keep after a number of years. 

There is huge flexibility which is great but also brings challenges in defining who is going to get what when and based on which criteria.  Steve may well want you to agree dividend policy and it is possible that a shareholders’ agreement will need to be drawn up as you may want his shares to be non-voting for example.  Each situation is bespoke to the individuals involved and seeing your accountant is a must to completely understand all the options.

Jason on the other hand isn’t performing.  You don’t feel you should pay him off, nor do you have huge amounts of time to train or manage him out so you’re hoping a carrot is better than a stick.

If that’s the case, and it is a big IF, targeting an amount per “result” is a good way forward but may not in fact make much difference.  The annoying truth you already know is that if his attitude is wrong then money won’t change that and if it’s good but he hasn’t got the skills he needs a written process to follow and your time – not just more money.

If it is more cash for Jason then the choice you have is to base it on a percentage of gross profit or revenue.   Revenue is easy to measure but gross profit aligns your interests to help ensure he doesn’t sell cheap.

Finally, you could offer discretionary bonuses but in my view these are useless as an incentivisation tool and are mostly just a, frequently unappreciated, thank you.  Agreed targets don’t deliver the same flexibility as complete discretion but in many ways people are often happier when they know where they stand!