CEO's Discuss Incentive Compensation

The following are the highlights of the Executive Briefing on
Incentive Compensation
for Small to Mid Sized Companies

James Kaitz, CEO of The Association For Financial Professionals shared that his organization has exceeded their annual targets using an incentive plan and described how the plan has encouraged teamwork through shared goals.

"At AFP, the CEO's objectives, as set by the Board of Directors, are published and known by all employees," said Kaitz. "We were very excited when the employees voted - on their own- to post their goals on the intranet. It was a great step.

Everyone can see everyone else's goals so it encourages better goals - no one wants to be seen as having "weak" goals."

Their plan has three major organizational objectives that establish the incentive pool level, and then performance against individual goals determines the specific award each employee receives. All employees have performance goals, usually 3 to 5 goals each.

"Each year the goal setting process gets easier. These are bottom up goals that are oriented toward the CEO's objectives and the core values of the organization. They are all
consolidated and ultimately reviewed by senior management. This process is taking less time each year. A really great outcome of this process is that employees begin to realize that to be successful, they have to work with other people, which has lead to an increased number of shared goals," explained Jim Kaitz. "Our results in the incentive plan have exceeded my expectations."

Dr. Laurence McCarthy, Chairman of Focus Technologies, Inc., described how his scientists and employees are getting the right results and making a profit in a tough market.
He described the evolution of Focus and the challenges the organization faced over time an the associated concerns in designing incentive plans. Focus was formed around a 1988 acquisition of a small privately held company located in the West. A change in culture was needed after the acquisition "Sales people were hated because new sales meant more work!" A lost has changed since then. Initially the incentive plan for the Western location was mainly tied to sales revenue, but over the past two years has been broadened to include quality and cost-based metrics. An Eastern location was established in 1994 to develop an online database and value-added laboratory services to pharmaceutical companies engaged
in the development of anti-infective drugs. Incentive compensation for this group was, until recently, focused on sales growth and market penetration. Cost management and profit goals now are a part of this organization’s incentives. "Our growth has been 15% per year and our success has been due to the efforts of our gifted employees who have responded to the changes in strategies needed sustain the company’s growth," said Dr. McCarthy.



Mike Finney, General Manager of Halifax Electric Membership Corporation, explained how his organization's customer satisfaction ratings have reached levels unheard of before. "When we first introduced the incentive plan 5 years ago, there was skepticism and some resistance by the employees, but I believe today everyone is happy we made the change," he said. "We had several features that were paramount in the plan design, including: making sure there was a return for both the employee and the organization; improving customer awareness and satisfaction; and, ensuring all employees had a certain amount of compensation at risk."

The final plan design is set so there is roughly a $2 to $3 return to the organization for every $1 included in the incentive pool. Halifax has an independent survey company perform a Satisfaction Survey every quarter and uses the annual average to measure success.

That survey company recently reported that Halifax has reached the top 10% in customer satisfaction. Every quarter, the incentive plan targets and progress toward goals are openly discussed in a meeting with all employees.

Mr. Finney described one of the most vivid


changes in culture, "Once employees realized
they were only going to earn a significant payout in the plan if they worked together, they started working together, and results really improved."

SUMMARY

All three firms have had periods where they did not reach goals in the incentive plan, and there was no payout. One company lost a key customer and had a bad year, but the plan helped everyone understand the impact and assisted them in recovering quickly. Halifax faced a challenge when they missed a goal by a very narrow margin. The decision reached was to honor the goal and not waffle. The result was stronger support by the Board.

These three cases indicate how valuable incentive plans can be and reflect results similar to those found in the Incentive Compensation Survey we recently completed. Comments by the employers contacted in our survey clearly indicate successful results in 93% of the cases. Organizations from all industries reported their incentive plans have had a positive impact on the organizational results.

If you would like a copy of the Incentive Compensation Survey, please contact us at dweide@hureco.com.



By: Al Weide, HURECO, INC., P.O. Box 2457, Vienna, VA 22183, Phone: 703-242-6344 Fax: 703-242-2897 www.performanceresult.com