When you hand out holiday gifts, do they go only to one segment of your employee population? How about your health plan or other benefits—are they doled out to a select few? To be truly effective, employee benefits like a healthcare program or retirement plan must be offered to all workers. Sure, the details may differ by job rank and longevity, but if a visible benefit or perk is withheld from some segment of your population, you are asking for strife in the ranks, and all the Whos in Whoville will see you as the Grinch.

So it is with incentive compensation. You may want to try this or think you’re already doing it, but most likely it’s extended to just one segment of your workforce. If so, you’re not only putting coal in the stockings of your other workers, but you’re Scrooging yourself out of a potential windfall of benefits. This month, as many people end the year reflecting on and celebrating achievements, I want you to look ahead to see what companywide gift you might share with staff.

Offering an incentive compensation program could be the most valuable package you wrap up for your company this year, and to truly be received in the spirit of the season, it must be democratically delivered. The benefits will not just land in the stockings of the employees, however; this is truly a gift that will keep giving to agency owners and everyone around them. The positive payback to your business and the functioning of the company will be abundant.

Results-Driven Comp

What used to be primarily a strategy for large, publicly held companies is now attracting the interest of smaller and privately held firms. I think the shift has come because it is understood that tying compensation directly to employee performance will help drive business results.

In the insurance agency world, however, it still amazes me that many executives fail to recognize the correlation between incentive pay and agency performance. Perhaps some agency owners theoretically buy into the concept but don’t know how to implement it. Also, I suspect that many executives think they’re already doing it. “Our producers are on commission,” they’ll say, “so the better they do, the more money they make and the better the company will do.” That’s fine, as far as it goes, but I have a holiday news flash: Incentive compensation is not just for salespeople.

Spotting the Correlation

I expect that many people do not fully realize or cannot make the correlation between compensation and performance. It’s a concept often used in entrepreneurial businesses but not so readily adopted by more established, old-line firms. In a way, however, this is a method of rejuvenating your company and reinvigorating a staid, old culture.

Think about this: Companies that have successfully transitioned from a standard compensation plan to pay-for-performance have found that such a culture will also help employees achieve their full potential. In such a people-focused business as ours, what could be more important? The system can serve as an incredible recruitment tool and help with retention because top talent remains motivated. All the while, it is also working to improve bottom-line results.

Alignment with Objectives

When proposing business tactics or systems, proponents will discuss “alignment” as a key element of success. What does alignment really mean? In a pay-for-performance plan, it’s relatively simple: Compensation is tied directly to company goals and objectives, and employees share a true win-win culture as people are rewarded significantly for achieving key company goals.

In previous articles regarding organizational structure and compensation, I have discussed key concepts that effectively utilize such compensation by directly tying company culture to goals and objectives. Here are four ways to measure the effectiveness of a plan:

• Achievement of new business goals
• Agency retention rate
• Total agency commission revenue
• Client satisfaction surveys.

If incentive compensation can be tied to metrics that are tracked and consistently shared with your team, they will get the picture and have incentives to ramp up their production.

It is a mystery to me why so few agencies tie compensation to measurements such as these. However, I do have one clue. I’ve found that many agency owners are afraid to share financial details with staff or simply don’t want to. Well, that attitude is as silly as stealing an entire town’s Christmas presents, and it will doom any efforts toward an incentive compensation plan as surely as trying to pull your sleigh with a beagle.

For pay-for-performance to work, tracking or monitoring measures must be linked to regular, top-to-bottom communication about the progress toward desired results. Otherwise, if you’ll recall your Grinch, you’re doomed to teeter on the precipice of a great fall. Here endeth the analogy.

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What’s In It For You

To sway those who want to keep their financials close to the vest, I often will tick off some of the many benefits that can accrue from instituting incentive compensation and opening the books so everyone can see how the company’s doing. The results include alignment with agency goals and objectives, better motivation and morale, improved recruiting capabilities and overall firm cost savings. Let’s take a look at each of those perceived benefits.

Goal Alignment. There’s an effect on three key areas:

• Productivity. This is the result of focus and cohesiveness. If your entire team understands agency goals and objectives and can link that to their own goals, they will become more productive.
• Teamwork. A common bond develops between people who have shared goals, and individual incentive to stay engaged is boosted by the carrot of compensation.
• Communication. Management will be on a continual process-improvement curve with communications because it will become essential to the firm’s success. It must continually update employees on their progress and the company’s metrics, and leadership must provide insight or feedback as to what must be done to keep performance on track.

Morale. Increased motivation comes from this shared purpose and a transparent look inside the process. In my experience, a well structured compensation plan brings out the best in employees, and the company benefits from that positive vibe. If managers can get their staff to perform at maximum capacity, that will filter throughout the organization and improve the performance of all employees. I define this as a culture-driven improvement rather than a process-driven one. It is an environment where people perform to achieve company goals because they realize they will greatly benefit as well.

Recruiting and retention. Every agency owner I know regularly complains about the difficulty in recruiting talent. The problem spans the agency, from account executives to account managers, producers to CSRs. The presence of a well designed performance plan will greatly aid in recruitment, and it will positively affect retention. The plan becomes a competitive advantage. Why can companies like Microsoft and Google recruit thousands of people every month? It is partially due to their compensation plans.

Cost savings. When I talk about cost savings, I’m not referring to cost cutting. The savings go much deeper than cuts would. Properly aligning goals and objectives with pay will set accountability. Also, developing reward systems ultimately weeds out those employees who do not buy into the company’s culture and end up costing the company thousands of dollars. What’s left is a leaner organization, and having everyone focused on the bottom line is much more effective than having your managers combing the budgets for cuts and savings.

Developing Your Plan

It’s not possible for me to outline a plan for your firm because one size does not fit all and you must create a plan that fits your individual agency’s needs. Also, integration will be the key, and how well a firm does that varies greatly. Let’s talk about each of these in detail.

Rightsizing. Your firm is unique—markets, positioning, team structure and management tree. Sure, all agencies have some key attributes, and one of those is that insurance agencies are people businesses. The industry operates on people and their relationships. Therefore, whenever I’m discussing a way to tailor an incentive compensation plan, I start with three questions:

• Is your current compensation plan driving the desired activities?
• Is your plan delivering the results your agency is looking to achieve?
• Are people reaching the goals and objectives you set for them?

If you thoroughly consider these questions, you’ll be formulating answers to other key pieces of information, such as your desired activities, agency results, and personnel goals and objectives.

As you grapple with these questions, consider these issues:

• Are your employees (or at least key employees) willing to take on more accountability for higher pay?
• Do they have the skills and capabilities necessary to succeed?
• Have you implemented the monitoring and reward systems up front so that people can truly measure the correlation between performance and pay?

In the end, to be successful, you have to craft an incentive plan that is unique and specific to your agency, your people and your desired outcomes.

Integration. It’s not possible to develop an incentive compensation plan in a silo. It must be part and parcel of your strategic plan and operations. In short, it must be integrated with other components of your business.

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Here are three key elements that must be properly developed for integration to have any chance of working:

Planning: You must be clear about how incentive compensation ties into your overall compensation package of salaries, commissions, benefits and perks. It’s not enough just to layer incentives on top of the existing mix. For most people, the motivation will be greater if they can see incentives as integral to their entire package.

Creating and, yes, selling the entire package to employees is an area where many agencies fall down. They do not clearly define and integrate performance and reward, so employees do not see the big picture. With a well structured and well communicated plan, an employee will be able to calculate incentive pay based on “what if” performance at any time.

Employees must also realize that performance pay is variable and based on the agency’s achieving set goals. This is where the incentive pay departs from the rest of the package; it is outside of other bonuses, merit increases or cost-of-living raises. The review process is different, too; it’s not just a matter of filling out a form but rather will hinge on key metrics that align goals and objectives with the agency’s performance.

Alignment: Integration can work only if the essentials of business management are followed and properly aligned with the incentive pay program. A direction statement must be set, and it must lay out the mission, vision, goals and objectives of your operation. Then, those items must be properly communicated to everyone on the team so that everyone—from receptionist to senior management—knows and understands the agency’s goals and objectives. Once these are in place and well understood, the final part of your integration plan can be put into place, which brings me to…

Performance management: There’s an old truism that “what is measured gets done.” I would add this corollary: “What is managed gets measured.” In simple terms, performance management is the ability to continually measure performance in an easy-to-understand, quantifiable way. It must be well thought out, not arbitrary. It must be well communicated.

At the heart of this process is proper management. Discard the thought of annual performance reviews, and think instead of weekly, monthly and quarterly. More importantly, consider how you will implement a robust communications system so that employees can measure the performance management system. As any successful leader will tell you, pay for performance requires planning, discipline and flexibility, just like any key strategic initiative.

To become a true results-driven agency, pay-for-performance or incentive compensation is critical to success. Ultimately, it will become part of your agency culture. If it’s successful, incentive compensation will result in a more energized and engaged workforce full of people who understand not only their roles and responsibilities but how each person’s role is key to driving agency success.

While keeping that big picture in mind as an overall goal, realize also that you must pay attention to detail, structuring the plan in a transparent, objective way, and then implementing it with proper communication and feedback mechanisms. Remember not to be a Grinch and hoard agency financial data or seek to hold down costs by skimping like Scrooge on development and implementation of this important strategic tool. These are the gifts for your employees this year, and they will pay dividends in the coming months.

If you are successful in developing your incentive compensation plan, I guarantee that you will improve your financial results and, in the end, enhance shareholder value, which should be the ultimate holiday gift you can give yourself.

Lieblein is a contributing writer and managing partner of Hales & Co. Rob.Lieblein@LeadersEdgeMagazine.com