I received numerous thoughtful e-mails about incentive compensation this month. Some people are concerned about my approach to incentive compensation, where I reward economic results with economic rewards. What about rewarding design? How can you measure and reward employees for design contributions?
Well maybe we should back up a bit and ask a different question. Why would any owner or company offer an incentive compensation program to their employees? To me the answer is quite clear. The only reason an owner would offer an incentive compensation program is because they are convinced that by doing so, they will earn more money for themselves. They are not offering incentive compensation because they are nice people.
As an illustration - let's say you own a company and are eking out a small to average profit (6 to 10% of net revenues) and would like to make some more money for yourself. You set a minimum goal of making a 10% profit. You then establish an incentive compensation plan where half of the profit in excess of 10% goes into the incentive compensation pool.
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The only reason that an owner would offer an Incentive Compensation program is because they are convinced that by doing so, they will earn more money for themselves.
Low and behold, employees who were previously uninterested in the money (because it wasn't theirs) slowly come around and within a year are consistently producing a 20%+ profit. The owners profit after incentive compensation distribution is now 15% of net revenues and the employees are sharing in the 5% - based upon their contribution to producing the profit. The owner is now perceived as a generous.
But let's get back to the original question. How can we reward employees for their design contributions? To that I say, the owner's primary motivation is not to reward anyone. The owner's primary motivation is to make more money for his or her self. They see the incentive compensation plan as a means to put more money in their own pocket - not their employees. By rewarding employees through an incentive compensation plan they are able to accomplish their primary objective.
My question to you is the following:
Would offering a financial incentive to architects and engineers produce a better design?
I am inclined to say no. Producing great design is its own reward. Over the years, many architects have told me that they would continue to practice architecture even if they didn't get paid. They entered the profession because they love what they do. I truly don't believe that offering a financial incentive would result in better design.
On the other hand, most design professionals have little to no training on running a business. If they were primarily interested in making money, they probably would have picked another profession. They are much more inclined to focus on profits when they are given a stake in the outcome.
As with most things in life, the 80/20 rule probably applies.
If an employee has a project management focus they cannot be totally divorced from design. They need to achieve a balance of 80% management and 20% design.
If an employee is primarily a designer they cannot be totally divorced from project management. They need to achieve a balance of 80% design and 20% management.
In order to make sure the designer is also focused on profits, they need to be tied into the incentive compensation plan. The best incentive plans reward designers based upon their project profitability.