In part 1 we talked about base pay, and automation optons around it, as well as some ways to find out quickly on the net if you are currently in the right ballpark with respect to how you're paying people.

Now we're going into incentive pay, which is where compensation structures get really powerful and interesting.

Incentive Pay

The purpose of a bonus plan is to further a company's strategy. That means you have to have one. Not an implicit, unconscious one based on inertia, but a focused well stated one. A strategy is "How will we succeed against competitors long term to achieve our vision. What hills will we take, what field goals will we make, and how will we exploit our strengths etc."

A strategy moves you towards a vision. A vision is a moral statement based on what your company does to make the world a better place. It must be doing something good or people wouldn't give you money.

Martin Luther King's (MLK) vision was multiracial peace and justice. His strategy for achieving that was nonviolent protest.

If your company can get a vision that powerful and a strategy that effective it would be pretty impressive indeed, but you can still go a long way with something more mundane.

Once you have a strategy, you can create KPIs (key performance indicators). What would
we measure to know if our strategy is being well executed. A KPI for MLK might have been
"number of violent incidents per protestor" and he would seek to reduce that over time.

Once you have a vision, a strategy, and some KPIs you can put bonus plans around them.

For a dry cleaner it might be

vision: clean clothes (that's moral because people really need that for health etc.)
strategy: low cost leader - we do it cheaper than anyone in town and drive competitors crazy
KPI: price differential to nearest competitor for various items that matter most to our clients.

Next time we'll go into a very specific example of how a consulting company might do all this.

Curt Finch is the author of a new book about time tracking.