Are your employees as much motivated as you are to grow the business and meet your objectives ?
Performance Incentive Plan (PIP) is a very effective way to motivate your employees to work on the business as hard as you do and care about it as their own. A well implemented PIP creates a win-win for both you and your employees and will transform your work force from an employee mindset to an entrepreneurial mindset. While every employee has their own motivation, money is a common denominator that motivates most people as it helps them in achieving their own dreams. A PIP enables your employees to earn more money based on their performance that contributes to the growth of your business. Transitioning your compensation structure with a PIP also reduces your fixed cost structure and structurally sets up your business for growth as a significant portion of your labor costs become variable.
Some businesses implement a PIP only for their sales force. While it is a must to have the entire sales team on a PIP, every function and employee in the organization including support functions such as operations, finance and even HR can be on a PIP that is tied to achieving the respective Key Performance Indicator (KPI) targets for these functions. Follow these guidelines to implement an effective PIP in your business:
Establish a good KPI measurement system:
A good KPI measurement system is required for successfully implementing PIP in your business. Implementing a good KPI measurement system as outlined in “5 steps to implement a good KPI measurement system” quantifies and reports key activities in your business and forms the basis for an effective PIP.
Prioritize functions and set targets for incentive pay:
Determine the parts of your organization that should be on PIP, the incentive pay target for each function and the KPI targets that determine the incentive for each function. It is typical to first implement a PIP with your sales team and then expand to other functions such as marketing, customer service, engineering, operations, finance and HR. Determine the portion of compensation that is fixed and incentive based for each function. For example the incentive pay component could be 100% for sales agents, 75% for sales managers, 50% for marketing and 25% for operations and other functions. Also, determine the incentive payout duration which should also be different by function. For example, the payout could be monthly for sales agents, quarterly for sales managers, bi-annual for engineering and annual for senior leadership.
Plan for a gradual roll out of PIP.
For each function you implement PIP, the roll out should be a gradual evolution and should be implemented by moving the employees from a fixed pay to an incentive pay model. Reduce the base compensation and increase the performance incentive in stages as shown in example below:
Communicate, Communicate and Communicate.
Clear and consultative communication is very essential when rolling out the PIP. Conduct meetings with small groups and clearly explain the rationale and show the potential for upside based on achieving and exceeding the KPI targets. It is critical that employees are not alienated with the PIP implementation and do not perceive this as a cost cutting initiative. After the program is rolled out ensure progress on the KPIs and associated incentive pay is communicated at regular intervals.
A well implemented Performance Incentive Plan is essential for growing your business and transforming your work force from an employee mindset to an entrepreneurial mindset. Implementing a PIP will take time and requires good planning and effective communication. But, once implemented and ingrained in the organization, it will provide you a significant competitive advantage and ensure sustainable growth.