Alignment of Interests and IncentivesBy Paul Wormley
In an earlier post I wrote about how the partners at Hadley Capital eat our own cooking. The investors in our funds appreciate this alignment of interest. We extend this alignment of interest to the management teams at our companies through incentive programs that reward employees for achieving key objectives and goals. When times are good, all boats rise. When times are bad, everyone works hard to bail out the boat. And there has been a decent amount of bailing over the last 24 months…
The senior managers of our companies are all owners of their respective companies either through purchased equity or through equity incentive programs. All of our managers also participate in incentive cash bonus programs and many of our managers utilize incentive cash bonus programs for their employees.
Of the hundreds of small companies we evaluate each year, very few are effectively utilizing incentive programs to drive positive change. Effective incentive programs are not complex and are not difficult to implement. Sales commissions represent the most basic form of incentives. Sell more = make more. But incentives havea place in all areas of a business from purchasing to manufacturing to development to customer service to administration. There are a few simple guidelines to keep in mind when structuring incentive programs:
Set goals – establish goals that are specific, measurable, easy to communicate and well-aligned with overall company goals
Measure results – design processes to measure and collect results on a regular basis
Display outcomes – employees need to know the score so display the information measured and the status towards the goals
Deliver timely rewards – reward employees as soon as possible after achievement of goals so that there is a clear feedback loop
Collect feedback – listen to employee recommendations for changes, improvements and problems and incorporate them into future incentive programs
Obviously the goals and objectives of each business are different. Defining the objectives for your business (or a part of your business) is the most important step. But a close second is developing incentive programs that will align the interests of the employees with management and ownership.
One of my favorite books on this topic is Jack Stack’s Great Game of Business. There are lots of other writings on incentive structures but, like most things in business and life, sometimes it’s easiest just to get started and learn as you go.