Paying a bonus in an SME? Are you crazy?

A few months ago, we received an inquiry from a client. Jorge is the owner of a small manufacturing company in Chile. He was in a bad mood when calling the consultant and he told us that his Production Manager cannot follow his directives, much less work independently. 

He told me that they met every day at the factory and every day he told him what to do. Of course, he felt that a manager with such a high salary shouldn’t be told what to do and on top of that, he doesn’t follow the directives. To make it worse, he added, it occurred to him to ask me for a variable in his salary. 

The idea seemed excellent to me, in the sense that it was the key to aligning his performance with the objectives and getting him to work with greater autonomy, but Jorge only saw an additional cost on the horizon. “Are you crazy?” He asked me, “it’s already expensive for me and you want it to be even more expensive…”

Are incentive programs an additional expense or an investment with a good return?

The medium-term incentive is a very common practice in large companies, but it is a very unusual practice – or poorly implemented – in SMEs. Why? 

Let’s see some myths that can be found in our practice and demolish these “myths in SMEs.”

• “The bonus increases the salary expense!” This is a very short-term thought that we hear regularly… If I define objectives as deadlines to meet, measurable and challenging data to achieve, it is an efficient way to align employees with the objectives of the organization, which increases the probability that those objectives will be met, thus resulting in a considerable return. Direct investment.In other words, if instead of looking at the amount of wage expenditure, we look at its impact as a percentage of productivity, it is about designing an incentive that increases productivity in a proportion equal to or greater than the increase in cost.

• “It is impossible to determine a one-year goal in a country like this!” It is true that we live in a context of great uncertainty. All the more reason to vary costs and reward successes! There are not only results objectives (what or how much needs to be achieved), but also process objectives (how we work) that are maintained through cyclical ups and downs.

• “It is too complex for my company.” Actually, there are different variable compensation systems. Some, it is true, are extremely complex and require the company to have sophisticated management systems capable of providing information and indices to measure the variables on which the bond will depend. But there are other ways that are much simpler and that are also efficient. The concept is always to identify the strategic objectives of the organization, then the initiatives with which that strategy will be carried out, and then to generate incentives so that the goals of each area and each person are aligned. But it can be done in many ways. In all companies, regardless of their size, sales, expenses, profits, profitability, etc. are recorded, in some by means of sophisticated software and others in a humbler way in Excel.These could be the variables to take into account for a medium-term incentive plan.

• “Very nice, but at the end of the year I have to put the money from my pocket.”No, you won’t. If the system is well designed, the money for variable compensation should come from the increase in productivity/profitability/sales generated by the alignment of interests caused by the incentive system.

In summary, variable compensation, when well structured, operates as an incentive, that is, a stimulus that helps direct people’s attention, behaviors, and efforts in the desired direction. 

This will not only be an optimization – and not an increase – in spending, but it also has other great advantages: 

1. Motivation: Defining goals and metrics creates clarity and a sense of accomplishment. That is extra motivation in your collaborators.
2. Performance measurement: An incentive program will allow you to measure the performance of your employees against a clear indicator. It is easier to see progress and distinguish efficient collaborators.
3. Featured Collaborators Detection: Related to the previous point, an incentive plan will allow the detection of talent within the organization.
4. Talent retention: If we compensate those who give outstanding results equal to those who do not, we discourage effort. Rewarding effort and, even more so, achievement, is a very powerful weapon for talent retention. At the same time, it will also help us attract talent in the competitive job market.
5.  The cost is offset by results/benefits: A good incentive program will generate an increase in benefits greater than its cost.
6.  Enhance teamwork: If you design the plan with team goals, you encourage collaboration, and quite possibly the work environment improves.

It does not matter whether productivity is higher or lower. It does not matter whether the goals are achieved or not. A fixed compensation says “it doesn’t matter”. Start designing a variable compensation plan for your company today!