Incentives That Really Reward and Motivate

Incentives That Really Reward and Motivate

Susan J. Marks

As a company’s major incentive, a gold watch after 30 years of service doesn’t cut it anymore. Given the ups and downs of Wall Street, stock options have lost much of their motivational luster. And in a soft economy, there may not be enough extra cash for bonus plans, especially in smaller companies.

So what’s an employer to do to motivate and reward employees? Surprisingly, marketwise companies that are serious about satisfying and retaining employees don’t seem to be making any changes at all. Despite uncertainty in today’s fast-paced global economy and tight labor market, recognition and reward programs are more important than ever, says Kimberly Smithson, president of the National Association for Employee Recognition and a consultant for CultureWorx, experts in behavior-consequence management.

Incentives are essential in order to keep top performers satisfied with their total compensation packages, says Frank Delmonte, HR consultant and principal with Hewitt Associates LLC, global management consultants. It will be the standouts who will play key future roles in nurturing new growth and rebuilding a company that’s on a slide in a soft economy. Businesses simply can’t afford to have talented people jump ship.

Phyllis Eisen, vice president of the Manufacturing Institute, the education and research arm of the 14,000-member National Association of Manufacturers, says it can cost even a small company $3,000 to $5,000 to train an outstanding employee.

Incentives and bonuses can be in cash, performance-based pay or bonuses, cash equivalents like travel awards, or benefits such as employee training. Eisen says employee training is the biggest retention incentive in the workplace today. For companies willing to settle for average and competent people, an ordinary incentive/rewards and compensation program will suffice, Delmonte says. “But, if you’re an organization that really is looking for opportunities to maximize growth and impact your financial results, and you’re looking for the A players, then you really have to have a huge tool belt of offerings in your total compensation program and it has to be competitive.” Incentives and rewards are an important part of that equation, he says.

Here’s how three different-sized companies deal with the issue.

SMALL COMPANY

A Low-Cost “Miles” Program Brings a Big Boost to Sales

Name: Lincoln Contractors Supply, Inc.

Location: Milwaukee, Wisconsin

Type of business: rents and sells construction equipment, tools, and supplies

Number of employees: 115

Lincoln Contractors takes a creative approach to incentives that distinguishes the company from its competition, and nets big returns. The family-owned Milwaukee firm gives points–what it calls miles–as sales incentives both to generate excitement and to reward outstanding job performance. The miles, available to any of its 115 employees, can be exchanged for merchandise, travel, or sporting event tickets.

Lincoln sells and rents construction equipment, tools, and supplies in seven stores throughout Wisconsin, and is one of the largest independent distributors of its kind in the United States. Its products range from a 20-cent concrete anchor to a $100,000 rough-terrain forklift.

Its incentive miles program works like this: If a Lincoln employee wants a new backyard grill, for example, he or she can “buy” either a charcoal model for 5,500 miles or a more upscale gas-powered version for 25,000 miles. One employee recently redeemed his miles for an all-terrain vehicle, another got a John Deere garden tractor, and another plans to take his wife to Spain next year with airline tickets “purchased” with miles, says Dale Guenther, company vice president.

Here are some features of Lincoln’s incentives program:

* For every 10 customers an employee signs up, he or she earns 1,000 miles per customer, for a total of 10,000 miles.

* To help get rid of old stock, employees receive miles equal to the dollar amount of an item sold.

* Exemplary service nets extra miles. One employee attended a trade show, generating numerous leads, and received 25,000 miles for a job well done.

* As a sales promotion, for every foot on a stepladder or inch on a diamond blade sold, employees earned 20 miles.

* Employees earn 1,000 miles for each year they are with the company.

Employee response to the program has been enthusiastic, Guenther says. Participation doesn’t cost employees anything, and the system generates sales and creates employee loyalty. Before the miles program, Lincoln relied solely on cash bonuses as incentives. But it’s the newer program that nets big results, he notes. In the first year of the little more than two-year-old plan, business was up almost 40 percent. In the second year, there was a 17 percent increase.

The program also is flexible, and can be adjusted yearly to account for economic or product changes. Though he won’t say what the program costs Lincoln, Guenther insists it’s cost-effective, especially because it’s stepping out of the box, doing something different from the competition. Product manufacturers also help defray the cost of some bonus promotions.

Once a month, Lincoln buys miles–perhaps one to two million–from program originators MMS Incentives, the Norcross, Georgia-based company that serves as project administrator. MMS operates about 3,200 incentive/rewards programs a year for tens of thousands of customers and employees. Clients range from Fortune 100 companies to the “Joe’s Beer Dealership” down the street, CEO Mylle Mangum says.

Mangum won’t talk about specific pricing, except to say it varies by company and objective. But she will say that MMS usually can provide an incentive program for one-half to two-thirds less than the amount companies spend in cash. A travel reward, for example, can cost a lot less through MMS because of its buying power in the marketplace. The company also has its own travel agency. “We can send anyone to the Ritz Carlton anywhere in the world a lot more cost effectively than if an employer were just going out and buying a trip,” Mangum says.

This kind of rewards program is also a lot more effective from an employer’s standpoint than cash. A travel reward may cost a company $350 to $500, but the trophy value to an employee can be much greater– as much as $1,000 to $1,500, Mangum adds. An employee rewarded with cash ends up pocketing it and paying an energy bill with it, for example. It’s not a “company currency” — the employee doesn’t think of it necessarily in conjunction with a reward for work performance at Lincoln. The miles or points program, on the other hand, is private labeled Lincoln Contractors points, and the reward is associated directly with the company. It optimizes what Mangum calls the share of “mind value.”

Guenther stresses, however, that every employee–whether a phone operator or a sales manager–should have an opportunity to participate. If they are left out, non-sales employees can get frustrated. “Our bookkeeper just had her 31st anniversary, and she got 31,000 miles.”

Rewards or recognition programs like Lincoln’s don’t put ready cash in an employee’s pocket. And, Eisen adds, people like cash. “It’s right there, right in their face. They can take it home in their paycheck or put it in their pocket. It’s something they feel.”

She says these types of rewards still can serve as extraordinary psychological and emotional incentives.

MEDIUM COMPANY

Productivity Bonuses and Profit Sharing Motivate a Team

Name: Behlen Manufacturing Co.

Location: Columbus, Nebraska

Type of business: manufactures livestock equipment; grain storage, drying, and handling systems; and building systems

Number of employees: 1,400

Whatever kind of recognition and incentive program a company decides to use, it takes support from the top to succeed–especially when return on investment is the name of the game, CultureWorx consultant Smithson says. At Behlen Manufacturing Co. in Columbus, Nebraska, there’s no question that the boardroom buys into incentives for its employees. The company capitalizes on employee involvement and offers cash incentives, gain sharing, and profit sharing. Gain sharing is a monthly bonus based on productivity, and profit sharing an annual reward based on profits. The result is tremendous employee loyalty and productivity, says chairman and CEO Tony Raimondo. “Our employees are all in the business fight with us, so our theme is ‘Make the company better off, and we will share.”‘

He cautions, however, that sharing the fruits of a company’s success with its employees is not just an incentive program but also a way of life. Leadership truly has to believe that the company and everyone in it will be better off or it won’t work. “I see a lot of CEOs who simply are not comfortable with that, and I don’t think they should do it, because the employees are very smart, and the whole baseline is trust and respect.”

Behlen manufactures livestock equipment; grain storage, drying, and handling systems; and building systems at several plants from Cullman, Alabama, to Baker City, Oregon. The company’s incentive system begins with a program called Awareness Is Money, which awards a minimum of $250 a month to an employee with the best idea about how to improve safety and productivity. The real bonus comes when the ideas are implemented and production increases. Depending on productivity, all employees also are participants in gain-sharing or productivity-sharing teams that can earn monthly bonuses of up to 12 percent of a person’s base pay, Raimondo says. Teams typically are made up of 10 to 30 people who participate in a product process from start to finish–such as manufacturing a building beam. Office employees as well as factory workers participate in the program.

Behlen’s profit-sharing plan is a further incentive. During a good year, for example, employees might receive 140 hours of pay as a cash bonus just before Christmas.

The programs are dedicated to creating participatory production environments rather than more traditional authoritative work cultures, Raimondo says. “We are always searching for ways to add value to customers. We think the key is the employees. If they share in the rewards, they will take better care of the customer.”

LARGE COMPANY

100-percent Bonuses Mean High Pay–Plus Low Labor Costs

Name: Nucor Corp.

Location: Charlotte, North Carolina

Type of business: largest steel producer in the United States

Number of employees: 8,000

At Nucor Corp., a share-the-wealth approach also has been a success. Based in Charlotte, North Carolina, the steel producer had a record $4.6 billion in revenues last year. It employs 8,000 people at 22 plants in nine states, and ranks among the Fortune 500.

The company pays much lower base wages–sometimes half of what the competition pays hourly workers–then uses weekly bonus cash payouts as an incentive. And they are not small amounts, either. Employees can earn 100 percent, 200 percent, and more of their regular hourly wage, with no cap, according to the amount of quality steel produced by, or passed through, a work team on a shift.

It’s a production-driven system that wouldn’t work for everyone. For non-union Nucor, however, it has worked since the 1960s, says James M. Coblin, vice president of human resources. “We have the highest productivity of any steel mill in the United States in terms of tons per employee or tons per hour. We have the highest-paid steelworkers on earth, and we have arguably among the lowest labor costs per ton produced. So that’s pretty phenomenal if you can have the highest-paid employees but the lowest labor cost.”

The secret to motivating people is money, he says. “If you give a bonus to somebody of 15 percent, of course they like it, or 20 percent, even 25 percent, of course they love it. But if you give them a bonus of 100 percent, you get their attention big-time, and when they start seeing 150 percent bonus or 160 percent bonus, they are focused on that bonus. And when they know it’s not going to be changed, like ratcheting up the base when they really start producing or putting a ceiling on it … they catch fire.”

The average pay in the year 2000 for Nucor’s steel mill employees was about $63,000, and many of those people were high school graduates living in small towns like Darlington, South Carolina; Jewitt, Texas; and Waterloo, Indiana, very small communities where a dollar goes a long way, Goblin says.

In good times, when business is booming, every employee–from a receptionist to the CEO–shares in profits. Conversely, during down times there’s sharing, too. The company doesn’t lay off employees, but shuts down its production lines for one or two days a week. Salaried executives still work, but hourly employees aren’t required to. About 80 percent of Nucor’s employees are on this production-incentive plan. Other employees also have performance-based compensation:

* Department managers earn annual incentive bonuses based primarily on the percentage of net income to dollars of assets employed for their divisions. These bonuses can be as much as 80 percent of a department manager’s base pay.

* Professional and clerical employees not on other plans earn bonuses based on their division’s net income return on assets.

Senior officers earn lower base salaries, with the remainder of their compensation based on Nucor’s annual overall percentage of net income to stockholder’s equity, which is paid out in cash and stock.

Coblin says the Nucor system is about giving high wages to average people for outstanding production, and about giving responsibility and authority to lower-level employees. It’s the worker who drives production–and the bottom line–not the executives. That can be a tough concept for authoritative managers and companies to grasp.

Another key to Nucor’s success is the simplicity of its incentive system, Coblin says. If every employee can understand and see how an incentive plan affects him each week, then it can succeed. If not, it won’t work in the long term.

Beyond its bonus structure, Nucor also rewards employees with free dinners, jackets, and hats for outstanding production or safety records broken. Service awards are handed out every five years. Employees receive one share of stock for every year at Nucor. Workers are essential to the company’s success, and are stockholders.

It’s that ownership connection that is key to employee performance, NAM’s Eisen adds. She calls Nucor an extraordinary company. “They are using cash to incent. Other companies use benefits to incent. Who is the winner? I think you have to look at your own workforce.”

Susan J. Marks is a freelance writer based in Littleton, Colorado.

Incentive Do’s and Don’ts

The experts offer a few suggestions for companies re-evaluating or thinking about adding incentive/reward programs:

* Don’t rush into making modifications to your pay program just because the economy softens, says Hewitt Associates’ Frank Delmonte.

* Particularly in down economic times, pay special attention to and reward your high performers. “The cost of losing them is going to far exceed the investment you make to retain them,” Delmonte says.

* Be sure that company leadership supports the rewards/recognition programs and allocates resources for the programs, says Kimberly Smithson, consultant and president of the National Association for Employee Recognition.

* Train managers, leaders, and supervisors on how to deliver recognition. A 20-year pin in an inbox doesn’t cut it, Smithson says. “Good recognition is timely, personal, and very specific.”

* Recognition and rewards have to be consistent and fairly administered across an organization. That’s a common gripe among employees, Smithson says.

Nucor’s Reward System

All employees at steel giant Nucor are covered by one of four performance-related compensation systems. Each of the plans relate to specific goals and targets depending on the job. Nucor also periodically has issued an extraordinary bonus to all employees, except officers, in years of particularly strong company performance. This bonus has been as high as $800 for each employee. The four ongoing bonus plans include:

* Production Incentivc Plan: Operating and maintenance employees and supervisors at the facilities are paid weekly bonuses based on the productivity of their work group. The rate is calculated based on the capabilities of the equipment employed, and no bonus is paid if the equipment is not operating. In general, the production incentive bonus can average from 80 to 150 percent of an employee’s base pay. The vast majority of the company’s employees are covered under this plan.

* Department Manager Incentive Plan: Department managers earn annual incentive bonuses based primarily on the percentage of net income to dollars of assets employed for their division. These bonuses can be as much as 80 percent of a department manager’s base pay.

* Professional and Clerical Bonus Plan: This bonus is paid to employees who are not on the production or department manager plan and is based on the division’s net income return on assets.

* Senior Officers Incentive Plan: Nucor’s senior officers do not have employment contracts. They do not participate in any pension, discretionary bonus, or retirement plans. Their base salaries are set lower than what executives receive in comparable companies. The remainder of their compensation is based on Nucor’s annual overall percentage of net income to stockholder’s equity and is paid out in cash and stock.

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