When and where do we create temporary incentive plans, meant to bridge a short-term gap in our reward offerings?
Let me lay out one particular (but not entirely uncommon) scenario.
Many organizations offer the opportunity for an annual cash profit sharing award to their employees, a way to share with them the financial success they help create for the business. Plans like this are popular in public and private companies alike.
In many cases, these plans come to occupy a revered place in the company’s culture and become a key feature in its employment brand, reinforcing the sense of an organization where everyone is rewarded for a winning year.
Until they don’t.
The things that happen to profit sharing plans
Sometimes these plans simply hit their expiration date, having fallen out of sync with the needs and economic realities of the business. In other cases, however, they encounter a bump in the road that was put there for a specific purpose.
A company with a reasonable track record of growth and profits reaches a point where they must leverage that financial base in order to move the business to its next level and create the conditions for future success. Investments are made and money is spent, on things from acquisitions to business systems to capital equipment upgrades.
It may be all good; in fact, it may even be great. The company is building a better tomorrow for its owners/shareholders and its employees. People are working hard in the face of change and challenge.
But cash is tight, income is being directed to business investments and the profit sharing plan is not paying out.
I’ve worked with a few companies who have found themselves in this situation and who have reached out for help in reviewing and potentially re-designing their plans. While some of these plans may be ripe and ready for an overhaul, others are still “on the money” (if not “in the money”) design-wise.
Balancing profit sharing and capital investments
The issue is that owners and leaders have made the decision to put what would have customarily (and will again in the future) be profits and funnel them into building capacity for future profits, future growth and future job opportunities. A couple of years out, if all goes as planned, the profit sharing plan will be paying off handsomely again and employees will reap the benefits of the investments not just in their paychecks, but in future employment and career growth opportunities.
The question is this: what, if anything, should be done in the meantime?
A client of mine is going through this experience right now. They are loathe to take a hammer to their beloved profit sharing plan, which has been one of the crown jewels of their employment brand, but they are struggling with how to bridge the profit chasm through this period of heavy investment in the company’s future.
One solution we’ve discussed is to create a specific “over-the-hump” plan, something with a defined lifespan that pays out at lower levels than profit sharing traditionally would, but that would be aligned with some important milestones for the investments being made and would provide some level of positive reinforcement for getting the right things done during this key period.
It would look different and operate apart from the profit sharing plan, and it would have a defined sunset in place.
Heading down a slippery slope
You know and I know that the idea of bridging an incentive payout gap or helping participants over a payout hump represents a slippery slope, one we need to tread around carefully. Simply applying a pay bandage every time a profit sharing plan doesn’t pay out can put you on the fast track to create an entitlement mentality.
At the same time, there are conditions where this is the smart and fair thing to do. No easy call.
What experiences and thoughts would you offer? What type of bridge or “over the hump” plans have you encountered or designed?
Where does this work well — and where is it a bad idea?
This was originally published on Ann Bares’ Compensation Force blog.