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Are You Certain That Your Incentive Scheme(s) Contributes To Your Company’s Results?

If you answer in the affirmative – can you state it beyond reasonable doubt? If still in the affirmative, do you know why or what about the scheme enables it to contribute to the company’s results?

The reality is that most companies do not know to what extent the variable incentive scheme creates additional shareholder value and how it can be adapted to increase the benefit delivered. However, a model is now available to measure the impact that an incentive scheme has on the operational behaviour of participants in the scheme and projects the impact on business results. It also analyses why the behaviour does or does not impact on business results.

These characteristics of the model put a powerful tool in the hands of the reward practitioner. The reward practitioner can now confidently answer the question: “Did you achieve business results because of or in spite of the incentive scheme?” This is a major breakthrough in the governance of remuneration practices. Research indicates that on average about 8% of the payroll consists of incentive pay. But here is the frightening statistic, when assessed empirically; up to 20% of all incentive schemes do not contribute to business results at all. A further 50% incentive schemes can benefit substantially from improvement and enhancement.

Now, think of the impact that reward practitioners can make on the national economy if we all apply this methodology systematically.

The methodology is ideal to shake-up old stale, well entrenched incentive and bonus schemes. We all know them, the ‘company bonus scheme’, the ‘performance recognition scheme’, the ‘we all share in prosperity scheme’. This methodology is not influenced by sentiment, it keeps on asking that one haunting question: Did you achieve your results because or in spite of the scheme? It answers the question clinically and objectively.

However, the methodology is not just cynical. It assists the practitioner to diagnose with objective accuracy, why the scheme adds value or not. The practitioner walks away with an accurate analysis of strengths and weaknesses that will direct redesign and improvement. If the scheme does contribute to business results, it indicates exactly why you claim success.

Think of how useful this is from a corporate governance perspective? How valuable is it to be the poor director who has to risk his/her reputation and personal wealth every time they approve an incentive scheme?

Imagine, you are a designer of a company incentive scheme that pays out R 500m. If the incentive does not contribute to improve business results, you have wasted half a billion Rand. Would it not be great, if you have the certainty that an objective analysis reveals that the incentive scheme will influence business results? Think of the poor directors who have to approve the scheme. How do they justify their decisions? The methodology allows analysis of the scheme design and projects the impact of the scheme on business results. It projects whether the scheme will or will not add value to the business.

It is recommended that assessments are done regularly during the life of the scheme and that the assessments are used to correct errors made during implementation and leveraging of the scheme. This is done through quarterly dipstick reviews and corrections to the incentive scheme.

After payout a final assessment is done to determine if the scheme in fact did contribute to business results. This is important for continued application. Recommendations about improvements will also be provided. As part of corporate governance, being able to state with increased certainty that the incentive scheme contributed to business results, is a tremendous benefit. For the first time approvers of incentive schemes are given an instrument to allow them to discharge their responsibilities in a defendable way.

In empirical research, it was found that participant behaviour explains 34,5% of the variance in business results. The rest of the variance is explained by external factors such as economic factors, competition, availability of resources, politics etc. – the rising tide that lifts all ships. Variable pay can be the catalyst that creates the difference or it could be paid because it is high tide. What business needs is an instrument that differentiates when it is because of the incentive and not in spite of it.