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Combining Incentive Compensation with Employee Evaluations

Wouldn't it be nice to have employees looking for more business to handle or helping to innovate to permit more work to be accomplished without the addition of staff? An Incentive Compensation Program (ICP) accomplishes that goal -- but it takes a few years of education to teach the employees that this is really as simple as it sounds. Below are some tips on how you can accomplish this.

An Incentive Compensation Program (ICP) is designed to remove the subjectivity from the process of increasing compensation for performance. ICP's are typically constructed based on advances in productivity (revenue per employee) combined with department and/or agency profitability. If the individual manages a larger book of business (service employees) or manages his/her function for a larger client base (i.e. administrative employees) WHILE their department and/or the agency maintains appropriate profit levels, raises are automatic and can actually be tracked by the employees, themselves.

Wouldn't it be nice to have employees looking for more business to handle or helping to innovate to permit more work to be accomplished without the addition of staff? An ICP accomplishes that goal - but it takes a few years of education to teach the employees that this is really as simple as it sounds. If an individual is more productive AND if the department and/or the agency is profitable, that individual shares in his/her success through salary adjustments corresponding to the productivity increase.

The "Merit Raise" system in which we have been raised is often less concerned with merit than with management's perception of an employee, combined with the frank realities of budgetary limitations. A variety of rating systems have been developed to establish some form of "objective" criteria under which the "merit" system is to operate. Unfortunately, those very numerical rating systems must be based on a manager's estimates of employee performance.

The ICP is firmly based in budgets since agency growth (overall productivity) and agency profit predetermine the amount available for raises. A specified percentage of revenue is pre-determined to be the total staff compensation level. The employees earn raises by virtue of their productivity gains within the budgetary limits. The ICP also avoids the subjectivity of traditional merit raise programs. Evaluations become tools for employee development, rather than the rationale for the level of raise being given. The manager can not forsake his duty to evaluate employees' performance. The manager's job is to identify an employee's weaknesses and correct them through a development plan and to assist employees to further develop their careers to make them more productive for themselves and for the agency.

Whether or not you choose to pursue ICP's in your business, the key to employee development and retention lies in a combination of fair and equitable compensation, fair and equitable evaluation, and genuine appreciation for the efforts made by the staff. Please understand that appreciation is reflected by your actions, not your words. Some managers verbally express appreciation, then publicly criticize or demean employees. The employees recognize that managers actions truly reflect their feelings.

Compensation can only be fair and equitable if the agency has the revenue and profit to afford raises AND if the employees understand the ingredients that result in their pay raise. If they believe that their raises are determined subjectively and that management is more concerned with enhanced profit than with fairly paid employees, no raise will be viewed without suspicion and no evaluation will be accepted as an honest evaluation of performance.

In the past, all evaluations have been tied to pay raises. Management could not provide a glowing evaluation and a meager pay raise without using the agency's poor financial condition as the reason. Most of the time, the employees simply do not believe the agent since it appears that there is always sufficient funding available for the agent's discretionary expenditures.

One of the reasons for the development of the ICP concept was to "de-mystify" the compensation game. The employees themselves monitor their own progress and the agency should provide further input regarding its profitability throughout the year. If growth is not experienced, or if the agency is not profitable, they, themselves, can identify the reasons for lower raises than desired.

Evaluations must be separated from pay raises. As long as evaluations are only done when pay raises are due, the employee listens to whatever critique is being offered with an ear that is listening for what the evaluation means to the pay raise. If compensation advances are determined by objective means, evaluations can be used for the purpose for which they were created -- to evaluate historical performance and to further develop the employee's career. We suggest the following changes to evaluation programs:

Evaluate three or more times each year (minimum twice). Employees don't want to hear what they are doing right or wrong once each year. They would like to hear praise often and to hear criticism when it is used to help them, not to attack them. Evaluations are also one of a manager's most important roles. We may be insurance professionals, but the most successful of us are also management professionals. Just as you did not learn insurance easily, quickly or haphazardly, neither can you learn how to be a manager quickly, easily or haphazardly. Most managers feel uncomfortable evaluating performance because it is an event, rather than a process, so...
Make evaluations a process. The process of evaluation includes an analysis of historical performance (since the last evaluation) in accordance with the employee's job description. The job description should list all major activities for which an employee is responsible in his/her job and the measurements of success for each. The process also includes a development program that both attacks any weaknesses uncovered and determines the development path to further strengthen the employee in the future.
Make evaluations a shared process. The best evaluations provide a form that includes the points of the job description, the success measures of each, and a place to evaluate performance in each area. Both the manager and the employee should complete the form (independently) and compare and discuss the results together.
Critique - Don't criticize. Most employees will be harder on themselves than will the manager. Your job is to critique their performance and help them improve soft spots and further develop strong areas. Remember that this is a development exercise having to do with them becoming better employees. It is not connected to pay raises.
More important than the historical evaluation is the development plan. Another form should be developed for this tool. The form should identify areas of perceived weakness and areas of desired development. After the historical evaluation, both the manager and the employee should take the form and complete it individually. The results should be shared and will become a basis for future evaluation. The development plan to which both employee and manager agree must be implemented between this evaluation and the next. For this reason, evaluation development plans are between three and six months long (depending on how often you evaluate).

The creation of non-threatening evaluation systems and objective compensation programs will differentiate the exceptional business from those who experience unexpected and frequent turnover. The excuse may be that the employee has moved for money. The reality is that the departed employee did not feel that their former employer was fair. That perception, whether grounded in reality or not, can be clarified through the auspices of an ICP and Employee Evaluation Program.

If you have any questions about producer compensation, please contact us at al@agencyconsulting.com or visit our web site at www.agencyconsulting.com.