1. Pay employees salary and incentives. The companies with the highest employee morale and productivity pay a mix of salary and incentives. The salary compensates employees for performing all the tasks required of them and provides them with a consistent income. The incentive (which can be commission for salespeople and a bonus for others) motivates them to meet and exceed their goals and gives them the opportunity to increase their earnings.
Pay employees the salary portion of their compensation monthly or bi-monthly. Pay employees the incentive portion of their compensation as soon after they meet their goals as feasible. Thus, quarterly incentive payments are usually more motivating than annual payments and monthly incentive payments are often best.
2. Keep the incentive part of your plan simple. The test of a good compensation plan is that the incentive part measures no more than two to four performance factors, and all employees can accurately explain the plan in the time it takes to walk from the front door of your office building to your receptionist's desk.
3. Establish SMART goals. SMART goals are: Specific, Measurable, Ambitious, Realistic and Time-bound.
For salespeople, that means establishing monthly and annual revenue goals and/or goals for opening new accounts. For other customer contact people, establish goals for the ratio of customer compliments versus complaints, and/or the number of customer complaints they resolve on the first phone call. For employees in accounts receivable, consider basing goals on how much outstanding revenue they collect against specific targets. For those in manufacturing, consider basing goals on the number of products they manufacture free of defects.
While it's okay to pay a small part of the incentives based on the team's overall results, most of the incentive should be based on individual results.
4. Determine what your competitors are paying. One way to attract and retain top employees-and keep them motivated is to pay them as much or more than your competitors. Every few years, you should determine what your competitors are paying and adjust your compensation plan accordingly. You can do this informally by asking employees with other companies that you interview about their compensation plan, or more objectively by hiring an outside consulting firm to benchmark your plan against others and advise you on how to adjust it.
5. Modify salaries based on employees' geographic location. While the incentive plan for employees working in different cities should not change, you should adjust the salary portion to reflect the local cost of living, so as not to penalize employees who live in more expensive cities.
6. Use merit increases to reward top performers. In a misguided attempt to keep all employees happy, many companies misallocate the funds they budget for annual merit increases by giving all employees essentially the same merit increases. Your first priority should be to retain and motivate star employees, your second priority to retain and motivate satisfactory employees. Therefore, award the largest salary increases to your stars, much more modest increases to satisfactory performers, and no increases to employees whose performance falls below expectations.
7. Provide employees with non-financial rewards. Besides cash, employees are motivated by other forms of recognition and rewards. For example, consider establishing an annual trip to reward employees who have achieved certain annual goals. Besides increasing motivation, company-sponsored trips build camaraderie and teamwork. How you train, develop and manage your employees also drives retention and performance. However, paying them as well as you realistically can — based on their performance — is one of the best ways to heighten their motivation.
Ron Volper, Ph.D., is a leading authority on business development and the author of "Up Your Sales in a Down Market: 20 Strategies from Top Performing Salespeople to Win Over Cautious Customers" (Career Press, Nov. 2011).