Klemm Associates

1. Klemm & Associates Executive Management Series Building Incentive Plans in Your Company Andy Klemm

2. Klemm's Quick Guides for Incentives As Much Art as Science Follow a Process not a program 7.5% to 15% Minimum Ideally 3 Goals, but 2 to 4 Maybe OK One Page for Individuals Fix Right Away

3. Overview of the Session�1 of 1 Incentive Theory Range of Practices The Case Against Incentives Feasibility Study Process Plan Design Implementation and Monitoring Team Exercise Final Thoughts

4. Compensation Objectives�1 of 1 Further Strategic Intent Attract and Retain Qualified Employees Increase Employee Ownership Provide Motivation Reward Individual Performance Reward Group Performance

5. Theory�1 of 15�Objectives�1 of 3 Compensation & Incentive Objectives�1 of 3 Further Strategic Intent Reinforce Values Communicate Goals and Objectives Create Common Understanding of Goals

6. Theory�2 of 15�Objectives�2 of 3 Compensation & Incentive Objectives�2 of 3 Attract and Retain Qualified Employees Increase Employee Ownership Actual�via Stock Theoretical�via Belief in Vision and Goals Increase Job Satisfaction

7. Theory�3 of 15�Objectives�3 of 3 Compensation & Incentive Objectives�3 of 3 Make Performance Standards Clear Provide Motivation Get Employees to Produce Results Modify Behavior Influence, Encourage, or Spur Action Reward Performance

8. Theory�4 of 15�Motivation�Abraham Maslow 1954�Motivation and Personality Hierarchy of Needs Basic (Food Clothing, Shelter, Health) Social (Membership and Friendship) Ego (Self-Esteem and Recognition) Self-Actualization (Growth & Service)

9. Theory�5 of 15�Motivation�Douglas McGregor 1960�The Human Side of Enterprise Theory X You're Bad�the Only Way I Can Control You is Through Economic Rewards Theory Y Capacity for Imagination, Ingenuity, and Creativity is Widely Distributed in the Work Force Linked With Joseph Scanlon (1940's) Industrial Relations Department at MIT

10. Theory�6 of 15�Motivation�Rensis Likert 1961�New Patterns of Management Authoritarian Paternalistic Consultative Participative Later: Partnership (Along with Bob Doyle)

11. Theory�7 of 15�Fred Herzberg 1966�The Motivation to Work�1 of 3 First of Two Factors�Motivating Factors Intrinsic to the Work Being Done Recognition Achievement Advancement Personal Growth

12. Theory�8 of 15�Fred Herzberg 1966�The Motivation to Work�2 of 3 Second of Two Factors�Hygiene Factors�Deficiencies in Extrinsic Factors Company Policies Working Conditions Supervision Salary Peer Relationships

13. Theory�9 of 15�Fred Herzberg 1966�Motivation to Work�3 of 3 Motivating Factors Must Be Designed Into Work Motivation is Intrinsic to Good Job Design Basis for Job Enrichment Expectancy Theory Comprehensive Model People Will Be Motivated if the Job Has Enough Variety and Challenge So They Feel a Sense of Accomplishment and Can Reward Themselves When They Perform Well

14. Theory�10 of 15�Sociotechnical Systems Theory�1 of 3 Relationship Between Technical System Required for Task and Social System Any Production System is a Social System Managers Must Consider Both Aspects Theory Does Not Define an Approach to Organization Change Usually Includes Autonomous Work Groups (Self-Directed Teams)

15. Theory�11 of 15�Sociotechnical Systems Theory�2 of 3 Complex Subset of Requirements Under Self-Directed Teams�1 of 2 Joint Committee to Work Control Variances Close to Event Origin Feedback to Where Action Occurs Skill-Based and Competency Pay Implementing Business Process Reengineering

16. Theory�12 of 15�Sociotechnical Systems Theory�3 of 3 Complex Subset of Requirements Under Self-Directed Teams�2 of 2 Team May Have Input to or Control of� Hiring Training Work Assignment Performance Assessment Promotion

17. Theory�13 of 15�Sociotechnical Worker Ranking of Reward Factors Higher Than Pay Having Interesting Work Their Work Being Appreciated Keeping Themselves Employable Being Kept "In on Things"

18. Theory�14 of 15�Supervisor Rank What Supervisors Think Workers Think Usually Think Pay is the Highest Ranking It's Not�It�s Usually at the Middle of the List Workers Like Being Kept "In on Things" Supervisors May Rank This Dead Last Managers Rank Listening Skills Very Low as a Requirement for Upcoming Managers But, Weren't Managers Workers Once? A Case of Forgetfulness and Deafness?

19. Theory�15 of 15�Summary Over Time the Work Force Has Risen Through Levels as Prosperity Generalizes Maslow Likert Expectations Rise Motivators Become Satisfiers Loyalty Falls Away Anomalies in Generations X, Y, Z

20. Range of Practices�1 of 5 Term of Plan Short-term: 1 Year or Less Long-Term: 3 to 5 Years

21. Range of Practices�2 of 5 The Basic Split is� Individual Group

22. Range of Practices�3 of 5�Individual 1 of 2 Arbitrary Merit�Yes, Merit Bonus MBO Balanced Scorecard Key Contributor Skill-Based Competency-Based

23. Range of Practices�4 of 5�Individual�2 of 2 Lightening Bolt or Spot Awards Stock�Myriad of Variations Options Restricted Stock Equity Simulator More Later

24. Range of Practices�5 of 5�Group Profit Sharing Team Incentive Scanlon Rucker Improshare Gainsharing

25. The Case Against Incentives�Alfie Kohn�1 of 5 Start With Alfie Kohn�Books, Articles, Speeches, TV, etc. Punished by Rewards The Trouble with Gold Stars, Incentive Plans, A's, Praise, and Other Bribes Seminal Article in the Harvard Business Review Speeches all Over the Country Appearances on Today Show

26. The Case Against Incentives�Alfie Kohn�2 of 5 Theory Bolstered by Lots of Research Reward Destroys Intrinsic Interest in Work The Group Without Reward� Stays on Task Longer Does a Better Job Is Interested in the Work

27. The Case Against Incentives�Alfie Kohn�3 of 5 ...We've Turned American Industry Into a Giant Skinner Box With a Parking Lot Other Prominent Thinkers Would Agree With Him to a Degree Deeming Drucker McGregor Doyle

28. The Case Against Incentives�Alfie Kohn�4 of 5 Kohn Cites Only One Substantial Real World Example But, What if He's Right? For Awhile it Won't Make Any Difference No One Believes Him And, Nobody has Heard Much About Him Lately

29. The Case Against�Alfie Kohn�5 of 5 What Do I Do With My Clients? Since Reading "All About Alfie," I Explain It to Clients Tell Them My Stance is Neutral I'm Monitoring Events I'm Open on the Issue It's Always Been the Case That Incentives Can be Destructive

30. Feasibility�1 of 4 Ability to Measure (or Judge) Absolutely Critical to make Sure You Can Measure Frequent Source of Breakdown and Doom of Plans In Design Phase Later, When Plan Needs to Be Changed Can Sour the Whole Effort

31. Feasibility�2 of 4 Getting Management on Board Best if It's Their Idea in the First Place Even Then, You May Have a Daunting Education Job Otherwise, Make Really Sure You've Captured Them Write a Compensation Philosophy�Be Serious Management in the Loop Throughout

32. Feasibility�3 of 4 Work Force Readiness�1 of 2 Assessment of the Work Force Intent�How Will They Respond to Incentives? Customary Tools to Determine Individual Interviews Focus Formal Survey Follow-up Surveys Usually Done by an Outsider If Incentives Have Been Used, the Picture Changes Assessment Becomes Analysis of What Has Happened

33. Feasibility�4 of 4 Work Force Readiness�2 of 2 If the Assessment is Bad News�Remedial Work Has to be Done (or You Have a �Kohn� site) Host of factors May Have to be Worked on Corporate Strategy Training Trust Building�Very common Changing the People � Yes�Firing and Hiring

34. Plan Design�1 of 17�General Eligibility Goal Setting Process Performance Standards and Measures Payout Amounts Payout Frequency Payout Form�Cash, Stock, Other Plan Document Communications Program

35. Plan Design�2 of 17�Eligibility�1 of 3 CEO for Sure, but How Much Further Down? Trend Has Been to Push Lower and Lower Often to the Shop or Office Floor�In the Name of� Pay for Performance Work Force Involvement Keeping a Lid on Fixed Base Pay Costs Gainsharing is an Example of the Ultimate CEO Down to the Janitor System

36. Plan Design�3 of 17�Eligibility�2 of 3 Sales�Almost Without Exception Information Processing Some Levels Sometimes Financial Jobs�Usually Higher Levels Operations�Can Go Deeply Here HR�Usually at the Top of the Org Chart Legal�Top of the Org Chart Only R&D�Sometimes�Can Be Tricky Here

37. Plan Design�4 of 17�Eligibility�3 of 3 Individual Jobs or People Now Considered What I Often Encourage Organizations to Do� Opt for Ultimate Flexibility and Fluidity In "The Job is Dead" Context� Individual is Only Way

38. Plan Design�5 of 17�Complexity�1 of 2 Ability to Manage Complexity Don't Build It If You Can't Manage It Don't Over Estimate Your Ability to Manage If You Take Away One Concept Today, Make It This

39. Plan Design�6 of 17�Complexity�2 of 2 Every Organization Has a Set Level for This Can Be Changed Only With Great Difficulty Lots of Side Effects Unintended Consequences Unanticipated Consequences Mismatch of Tolerance With Business Strategy

40. Plan Design�7 of 17�Measures�1 of 2 Must Match What Organization is Trying to Do Simple at Some Levels Changes in Return in Investment Complex and Subtle at Others Matching Competency Plan to Corporate Strategy Linking Goals at lower Levels to Strategy Qualitative, Judgmental Goals

41. Plan Design�8 of 17�Measures�2 of 2 List Can Go on Forever EVA ROI CFROI Rejects Productivity The Customer Feels Good

42. Plan Design 9 of 17�Payout Levels Threshold Target Expected Maximum Capped or Uncapped?

43. Plan Design 10 of 17�Payout Frequency Affected by Design, Intent, and Economics Annual Semi-annual Quarterly Monthly Weekly Tied Back to Complexity Issue Also

44. Plan Design 11 of 17�Stock�1 of 7 Is Stock on the Table at All? If Yes, Sleep Through the Next Two Slides Is Anything That Even Smells Like Stock on the Table? If Not, The Payout Forms Will Be Limited

45. Plan Design�12 of 17�Stock�2 of 7 Some Non-Stock Alternatives� Equity Simulators Phantom Stock Shadow Stock Performance Units Performance

46. Plan Design�13 of 17�Stock�3 of 7 Only a General Overview of Stock as a Payout Today Subject Can Be Very Complex Don't Tread Lightly in This Area

47. Plan Design�14 of 17�Stock�4 of 7 Stock Dilution Any Stock Payout Dilutes Owners' Interests Oops, New People May Have a Big Say Or, May be a Thorn in the Side of Management

48. Plan Design�15 of 17�Stock�5 of 7 Staying Private Valuation of Stock Keeping Plan Members Motivated For Buy Backs of Stock Controlling Ownership Exercise Great Care Drawing up Plan Securities Specialist Lawyer Should Be Used

49. Plan Design�16 of 17�Stock�6 of 7 Going Public Transition Plan Keeping People On Board Making People Rich At Least Some of Them

50. Plan Design�17 of 17�Stock�7 of 7 FASB State Securities Laws Lawyers, Accountants, Consultants, Software Public Relations

51. Implementation and Monitoring�1 of 2 Largest Issue is Communications Don't Let it Degrade Into a Program Make it a Learning Effort Plans Have to be Translated Up and Down the Line Test What Gets Communicated Is the Plan Understood as Intended? Tell Them Up Front the Plan Can and Will Be Changed (Check Your Comp Philosophy!)

52. Implementation and Monitoring�2 of 2 Monitor Progress Toward Payouts If the Plan Looks Off Target, Make a Correction Don't Let it Get Driven Into a Ditch There's Tons of Information Out There Ask for Help

53. Klemm's Quick Guides for Incentives�Repeated As Much Art as Science Follow a Process not a Program 7.5% to 15% Minimum Ideally 3 Goals, but 2 to 4 Maybe OK One Page for Individuals Fix Right Away

54. Team Exercise

55. Final Thoughts