During this time of year, we work with many of our landscape clients to create incentive plans for key employees for next year. Not all landscape companies are ready for incentive plans. 

To be ready, a landscape company must have:

• Accurate, timely and accessible data;
• Employees who have the capability to win;
• Employees who have the authority to act in ways that will enable them to win; and
• Great understanding of what actions will cause the company to have financial performance and achieve its other goals.

That’s why the Herring Group’s first rule of incentive plans is that the plan cannot be like a lottery ticket. 

We don’t want employees thinking, “I hope I win.” We want employees to know that if they take certain actions, they will win. Having a plan that rewards good company performance without incentivizing specific behaviors is usually a waste of money.

Incentive vs. outcome

“Show me the incentive, and I will show you the outcome,” Charlie Munger once said. This quote from the vice chairman of Berkshire Hathaway and longtime partner of Warren Buffet implies the need for great alignment between the company’s and employees’ interests when creating the incentive plan.

One technique for evaluating alignment is to consider what could happen in extreme situations and then ask how to prevent that outcome. 

For example, if a company incentivizes salespeople just on new revenue, the company may get a lot of unprofitable revenue — jobs bid too cheaply either through low markups or low hours and materials costs estimates. If a company incentivizes account managers or production managers solely on hours, then the easiest way to win is to do very little work. Obviously, customers will have an issue with that approach, and the company’s contract retention rate will decline.

Here are some more examples of misalignment:

• Incentivizing people on revenue without reference to actual gross margin (a percentage calculated by subtracting job costs from revenue and then dividing by revenue);
• Incentivizing production managers on labor hours without reference to quality, customer retention or customer satisfaction;
• Incentivizing people on maintenance contract retention without reference to gross margin (this provision incentivizes people to propose low renewal price increases — a big problem in an inflationary environment); and
• Failure to increase gross margin benchmarks for significant inflation in indirect (e.g., fuel) and overhead expenses.

Rewarding results

The Herring Group’s second rule of incentive plans is that the plan should provide above-average compensation to people who produce above-average results. In other words, get more; pay more. Some incentive plans are too generous, and others are too cheap. Incentive plans are a great way to create loyalty and help ensure the continued employment of your high-performing employees.

The Herring Group’s third rule of incentive plans is to keep them as simple as possible but as complicated as necessary to incentivize the desired actions and outcomes. To be clear, designing plans that balance simplicity with thoroughness is difficult.

The company needs a simple plan because an employee who does not understand how to calculate the incentive may treat the plan like a lottery ticket. However, if the plan is too simple, the company may not get the outcome it wants.

To increase understanding, we recommend clear communication of the plan and the specific actions required to win. We also recommend creating sample reports and sample incentive calculations to show employees how they can use the reports to monitor their performance and determine the incentive amount paid.  

Comprehensive business management software systems like Aspire make reporting and performance monitoring much faster and more efficient.

Does incentive plan design sound complicated? Unfortunately, it is. The good news is that a well-designed plan will increase the probability of the company reaching its goals with great financial results for many years to come.