Discretionary bonus pay has been a common feature at many A/E firms for years. Typically, a firm gets near the end of its fiscal year, determines the amount of money available as the year-end accounting dust settles, and on a usually purely subjective basis assigns individual bonuses. Principals often agonize for weeks attempting to fairly distribute earnings amongst staff only to have staff become frustrated and sometimes even angry over the manner in which their bonus was determined. Where’s the motivation in that?

A well-done incentive pay program establishes clear-cut, unambiguous goals and targeted rewards before the period begins over which performance will be measured. The objectively stated “game plan” is fully communicated to staff members in advance, thereby creating the incentive. In this way the individual knows exactly what he or she must achieve in order to obtain a specific reward and patterns his or her behavior appropriately.

A bonus system is traditionally reactive—and after the fact. An incentive pay system is proactive—and up front.

A word of caution: An incentive compensation system is never a proper substitute for a basic lack of holding staff accountable for their individual responsibilities. Firms sometimes rush into incentives as a non-confrontational, painless way to attempt to get people to “do their jobs”. A lack of fundamental accountability within a firm is a serious structural flaw that must be dealt with directly before considering the introduction of incentive compensation. Incentives can make a well-managed firm better, but they can never make a poorly managed firm good.

Keep in mind that architectural and engineering firms are team sports. When establishing individual incentive goals and rewards, always blend personal performance factors with company-wide performance factors. The employee should find as much incentive to help the company achieve its collective goals as they do to achieve their individual goals.

Tying incentives exclusively to an individual’s accomplishments without strong interrelationships to group performance can create a whole new set of problems. By the very nature of our work, firms rely on their people to cooperatively work together to be successful. If too much emphasis is placed on MY responsibilities and MY goals, I may fail to support, or worse, stand in the way of others in their attempts to reach peak performance. Some firms have inadvertently created destructive levels of internal competition by placing too much emphasis on individual performance at the expense of overall firm achievement.

Should you decide to implement an incentive compensation system, don’t skimp on the rewards; go for it! A plan that offers a potential carrot of 5 to 10% over basic salary is too anemic to have much effect and probably won’t be worth the effort and expense to put in place. To really zip things up, you’ll need to design a program with the potential to add at least 20 to 25% or more to a person’s compensation when personal and company goals are fully obtained.

Before you faint, keep in mind the funds to pay for these incentives will either come from existing profits or from incremental increases in firm productivity and profitability. By properly designing the goals and incentives, the firm will only incur the additional compensation costs if they are earned through increased levels of performance. If goals and targets are not reached, the additional expense will not be realized.

As you can see, plan design becomes extremely important. You’ll want to make sure incentives are linked to increased performance; but, at the same time, the targets must be perceived as reasonable and reachable or they’ll fail to inspire people to invest the needed effort to try.

Finally, progress on both personal and company performance targets should be monitored and periodically communicated. If your performance period is annual, you should provide quarterly updates as you go through the year.

Individualized incentive compensation is catching on quickly at many firms. Take a close look to see if it can work for you.

Key Points: Individual Incentive Compensation

1. Never substitute incentives for basic accountability

2. The plan should be clearly communicated and thoroughly understood in advance of implementation

3. A good plan design can create a powerful recruiting and retention advantage

4. A poor plan design can lead to serious internal conflicts

5. All goals should be objective and measurable

6. Design goals around the behaviors you seek to encourage

7. Balance individual performance goals with company-wide goals

8. Allow for additional compensation potential of at least 20% or higher

9. Properly designed, the funds to pay incentives will come from increased profits

10. Provide frequent updates comparing actual performance to goals

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