MSP incentive programs help to align company goals with employees’ incentives. Many companies find that implementing an incentive program changes the entire dynamic of their organization, allowing them to push higher and achieve more than they thought possible. Let’s look at a few guidelines for implementing your incentive program as there are a few gotchas to be concerned about and implementing the program without a clear eye towards the outcomes may bring disastrous consequences.
Why Do I need an MSP Incentive Program
MSP incentive programs have become very popular lately. While an incentive plan allows employees to receive above market compensation pay, it is different than a bonus program. We will discuss both below to clarify the difference. An incentive program’s goal is to reward an employee for helping to meet the companies’ goals. When the company does well, the employee shares in that result. This drives employee engagement and satisfaction.
Company goals should be well defined and communicated to employees but also reflected in the annual budget. If employees do not know the goal(s) they cannot help you achieve it. You may think, “they don’t need to know, they just need to do their job.” This is outdated thinking and scholars have concluded that employee engagement is highest when employees know the goals and can track their progress.
Where to Start your MSP Incentive Program
Every good incentive plan should start with a budget. Mature organizations build a budget each year and stick to it as closely as they can. It is the measure of success. Business schools will often tell you that the measure of a successful manager is the ability to influence the profit and loss statement through management change.
Your budget should reflect your previous year’s performance, along with the expected growth in sales and margins you predict for your organization. Don’t be afraid to set “stretch goals” in this area. You should have a plan that backs it up, but if the budget is the baseline for an incentive program the goals should not be easily attainable. Stretch just a bit to ensure your team has a target to shoot for that they can attain with the proper amount of effort and hustle.
Be sure your organization is strictly tracking your attainment of budget with a budget versus actual report. This will be the baseline for tracking the effectiveness of your employees’ efforts.
Bonus plan versus Incentive plan
What is the difference between a bonus plan and an incentive plan? While there is a plethora of different types of programs that sometimes use these terms interchangeably, the main difference is based on the base compensation.
For example, an employee may be a 60k year employee, which is being paid based on market pay for that position. An incentive program would split a portion of that pay into “base plus incentive” so instead of receiving the 60k year salary, they would receive 80% of their pay as a base and 20% of their pay as incentive based on meeting the goals that are set forth in the plan.
A bonus plan is where money is paid to the employee on top of their market-based pay. Generally, the total payout for these plans across the company is limited to a certain about of profit or margin that is generated by the company. While this is probably better for the employee, it does not properly align the budgetary goals of the organization with compensation and may not be sustainable.
How to calculate the payout
As stated previously, an incentive program is based on paying 80% (this can be any number you like) of employee pay as a base and having them “earn” the other 20% or more when they hit the annual budget. Before you say “hey that does not seem fair to the employee” here is the good news. When employees achieve over 100% of budget you double the incentive effectively giving them higher than market pay (yes that is a bonus) than they would otherwise be earning. If they hit 103% of budget, you pay 106% of the incentive. If they hit 105%, you pay them 110% of the incentive and so on. Most organizations will cap this at 120% but that is up to you.
Based on this calculation, the payout an employee can achieve is between 20% of their pay up to 120% (or whatever you set that cap at) of the incentive. So back to our example, a 60k employee may have a base of 48k where their inventive pay would be $0-$12,000 (20% of the 60k) plus a possible bonus of $2,400 if they achieve the 110% of budget. Obviously, you can adjust the base any way you choose. Many folks that roll out the program choose to start at 95% and then go down 5% per year until they get to 80%.
What are the goals
The goals that you set for each person is based on what they influence the most. For example, service teams influence gross margin and customer satisfaction. It is a good idea to use two metrics that they heavily influence and one that is a shared goal. For service teams the three metrics might be “gross margin dollars,” “CSAT,” and “Budgeted MRR dollars”.
If you are building metrics for the marketing department it may be “MRR sales dollars,” “No. of marketing qualified leads,” and “Revenue”. Work with your leadership team to determine what are the most appropriate metrics for each position within your company. Just remember you will get what you incent so think hard about the expected results to ensure they align with company goals.
The goal is for the employee to hit 100% of budget in each category. Building a spreadsheet to track these metrics is mandatory. Once you have it in place, calculate their percentage of attainment to budget. Track the stats monthly but assess payouts quarterly. An employee may hit 90% of budget one month, 95% the second month and 105% the third month. Their score for that metric is 96.6% for the quarter. Next calculate the other two metrics the same way and then average the three scores together. This is the percentage of incentive they receive for the quarter.
How to implement the MSP incentive program
It is recommended that you build the program out in a spreadsheet program and run many scenarios to analyze the results before you put it into production. A deep analysis of the budget should be performed to ensure it is not easily attainable but also not out of reach. The reason you use budget attainment is to alleviate fears employees might have about you “moving the goal posts,” which is a common problem with programs like these.
While the easiest way to roll this program out is to have a big meeting and announce it, most employees will be concerned if the pay they have become used to is now reduced to 80%. Even though you will end up paying them the same or more than they receive now, since incentives are paid out quarterly employees will certainly feel like they are getting the short end of the stick. To alleviate fears consider starting with a smaller ratio like 90%/10% and rolling it out in lieu of a bonus or in conjunction. Another option might be to just introduce the compensation package to new employees so as you grow the ratio of employees on the program increases.
Some people choose to roll out a bonus program (salary plus performance bonus) and slowly transition to an incentive program. The bottom line is to think about it from the employee’s perspective and try hard to make it as minimally disruptive to their cash flow.
For those interested in diving in deeper, check out “The Great Game of Business” by Jack Stack. This book details the path taken by a real company to transition to incentive-based pay and the stellar results they achieved. As always, if you need further assistance, reach out to us here at RedVine Operations and we can point you in the right direction.