[Cover Story] Crafting a Better Carrot

In 2010, Action Pest Control in Evansville, Ind., sold an extra $300,000 in new business to existing customers. The following year, it sold $350,000. In 2012, the number jumped to $529,000. More than $600,000 is projected this year.

The secret? An effective employee incentive program, said COO Keith Smith.

When Smith joined the company in 2008, “referrals from our existing customer base were basically non-existent.” Today, the firm’s Partners in Growth program rewards technicians for sales from referrals. The program helped revenue jump 20 percent last year, he said.

We know what you’re thinking: How can I copy this winning program? Unfortunately, what works for one company may not work for another.

You need to know your company’s history, what’s realistic economically, and how to raise the bar on expectations, said Joey Harris, COO of Cook’s Pest Control in Decatur, Ala. You also need to avoid some common “fatal flaws,” said industry consultant Hal Coleman.

Successful incentive programs, said experts, share these characteristics:

They’re legal. Programs must comply with the Fair Labor Standards Act, said Dan Gordon, owner of PCO Bookkeepers in Newton, N.J. “There are a lot of guys out there who are doing it wrong and getting hit hard by the Department of Labor.” He’s seen 10 cases this past year.

Paying incentives, commissions, bonuses or a percent of production affects non-exempt employees’ hourly pay and overtime compensation, he explained. Know how to calculate and record these properly.

He suggested consulting with an accountant, labor attorney or human resources expert. Learn more on the Department of Labor’s website: www.dol.gov/compliance/topics/wages-commissions.htm#recordkeeping.

They’re aligned. An incentive should motivate employees to achieve a company objective. Whether payout or prize, it is a “reward for above-and-beyond current practices,” said Harris.

At Heron Lawn & Pest Control in Apopka, Fla., incentives are tied to standards of quality, sales, customer satisfaction, safety and more, depending on the job.

Employees accumulate points through the year to reach four levels of prizes. These are awarded quarterly and range from branded mugs to fancy dinners to a four-day cruise, the grand prize presented at year’s end.

The program has increased friendly competition among employees and elevated performance. In 2012, revenue increased 24 percent and nearly 20 percent of employees won the cruise, said COO Steve Okros.

They’re simple. Make programs easy to calculate mentally — I’m only $100 in sales away from a payout! — so employees can act on this information.

And base them on a single concept or objective. Action Pest Control’s program asks one question: If I encounter issues with your home while doing my service today, may I bring them to your attention? The technician points out broken crawlspace doors, termite tubes or inadequate insulation, and offers to have the company set up a more detailed inspection. He continues his service and turns over the lead to sales.

If a sale results, the technician gets 5 percent of the 15 percent commission. “The sales people love it because they’ve got people out there actively prospecting for them without having to go out and beat doors,” said Smith.

Too many variables make a program difficult for the office to track, especially if you have a large employee base, said Okros. Not having adequate office systems to calculate rewards quickly and accurately frustrates employees and makes them less willing to trust employers, added Gordon.

They have perceived value. Annual incentive pay should range between 8 and 12 percent of salary, said Ownership Thinking Consultant Tom Bouwer, who presented at Pest Management Canada 2013 in March and NPMA Academy in July 2012.

If an employee makes $50,000 a year, she should have the opportunity to earn about a $5,000 payout, he explained.

People’s motivation and productivity are highest when they have a 50 percent chance of success, so the program shouldn’t be too easy to achieve nor too difficult, Bouwer said.

Raising the bar too high gives the wrong impression and employees are “going to give up before it gets going,” said Harris.

Programs that create more work or stress won’t succeed either, said Coleman. He’s found owners surprised when a technician turns down money to perform an extra termite inspection. They don’t realize the extra stop will make the technician, who has customers depending on him to be on time and obligations at home, late. Very late if he finds termites. The extra pay isn’t worth the hassle. Owners need a salesperson dedicated to handling these leads, Coleman advised.

They involve everyone. “Give everybody something to shoot for” from the office clerk to senior manager, said Gordon. Managers, he said, should get payouts tied to hitting key performance indicators, like keeping labor or material costs under a certain number.

Ask employees where the business can be improved and “you’ll get lots of ideas” for incentive plans, said Bouwer.

Managers at Bulwark Exterminating in Mesa, Ariz., noticed technicians weren’t starting the day’s first service, scheduled for between 8 a.m. and 11 a.m., until 10 a.m. Though not technically late, this delay often threw a technician’s entire day behind schedule, said President Adam Seever.

His team calculated the company could save $200 a month per technician if technicians showed up 95 percent of the time to the first appointment in the first 20 minutes. The company installed GPS devices in service trucks to monitor arrivals, and recorded the time of the first stop on a simple spreadsheet.

Most technicians now get a $100 monthly bonus — Seever splits the difference — for showing up to the first call as expected.

They know what motivates. Different people are motivated by different prizes. “You have to know your people,” said Harris.

Some want money; others prefer praise and recognition. To draw everyone in, mix up the incentives. Cook’s Pest Control has offered flat-screen TVs, tablets, outdoor grills, plaques, trips, even a front-row parking space as prizes for contests that supplement its flat-rate-plus-commission plan for salespeople.

“Don’t get stuck in a rut,” advised Harris, who admitted “crazy stuff” like having everyone wash the winner’s car gets employees fired up. “From a business side, you’re not spending a lot of money but you’re getting the sales and they’re having fun with it, too.”

Prizes are taxable, reminded Gordon. “Everything needs to show up in their W-2.” If an item will cause a big tax hit for an employee, withhold taxes, he advised.

They’re self-funded. Incentive pay programs must generate profit before paying out.

First, establish a threshold, the “point we have to hit before we start funding the incentive pool,” said Bouwer. This is the amount of profit before tax needed to keep the business going. Then set a stretch goal, the reasonable level of profit you’d like to achieve. This is the point at which payouts begin. Once the threshold is met, determine what percent of every dollar will fund the incentive pool.

Say, for example, your threshold is $500,000 of profit and you’ve set a stretch goal of $800,000. For every dollar of profit earned after $500,000 and before $800,000, you put 30 percent into the incentive pool. In this example, the incentive pool would be 30 percent of $300,000, or $90,000.

Determine what’s reasonable by reviewing your financial history, advised Bouwer.

It’s also important to know you can fund a prize-based program. Okros had 8 percent more employees qualify for the cruise than expected. The total cost: $30,000 — a real problem if you don’t have the money. “You have to be careful” and quantify the worst-case scenario, he said.

They train for success. Having an incentive plan doesn’t mean employees are up to the task, cautioned Coleman. You have to train them to be successful at it.

At Action Pest Control, sales managers ride with new technicians to teach them how to ask the program’s central question.

Educate employees about profit: What it is, where it goes, how the company makes it, and how their actions impact it. “It’s a critical step most people miss,” said Bouwer. Employees need to know they “have to increase profit in order for them to share in profit.”

Most don’t understand profit is required to pay taxes, debt, reinvest in the business and provide owners and investors a reasonable return. Many believe owners take 30 to 40 percent of profit before tax for themselves, according to surveys Bouwer conducted. “That’s just crazy” when the average profit for U.S. companies is 5 percent in a good year, he said.

They’re promoted. Starting the program at Action Pest Control was “pretty difficult,” admitted Smith. Technicians weren’t keen on having a new duty added to their jobs.

To get buy-in, the company held contests and had branches compete against each other. For 18 months it awarded prizes for the most referrals or most dollars from referrals each quarter.

Finding high achievers at each branch helped. When that first person grabs hold of the program and gains success and praise, you’ll get the majority of people embracing it, Smith explained.

Coleman suggested posting program goals where everyone sees them. “It becomes something they think about every day, and they encourage each other and aspire to it.”

Employees “have to know what the goals are,” agreed Okros. Otherwise, “they won’t even try for it.”

They retain employees. “Turnover is definitely down” due to the rewards program at Heron Lawn & Pest Control, said Okros.

A National Center for Employee Ownership study confirms this, said Bouwer. Companies with ownership-thinking cultures had turnover rates of 3 percent in the 2008-09 recession compared to 12 percent at other companies.

Incentive programs contribute to a culture of caring, fun and high standards, Bouwer explained.

They can be designed to compensate technicians adequately in the off season, when some may leave seeking more stable paychecks, said Gordon.

They pay out often. “People like to get something fairly quickly,” so vary the length of your incentive program, said Harris. Gordon suggests using “short-term, medium-term and long-term carrots” and smaller prizes to keep more people happy.

A contest should pay out monthly or no longer than every three months, Harris said. If necessary, break up a long-term contest to keep employees’ attention.

Incentive pay is a long-term initiative, but employees still want to see they’re earning something, said Bouwer. These programs should pay out quarterly, holding back 50 percent for delivery at year end to adjust for revenue fluctuations.

Incentive pay is different from a bonus, which isn’t tied to specific objectives and doesn’t motivate employees to change behavior, said Bouwer. Employees come to expect bonuses: They don’t know what the amount will be but that it just “better be good.”

They’re accountable. If you change a plan you feel is paying out too much, how will employees feel, asked Bouwer. “They’re never going to trust another plan you put in place.”

Likewise, if you lower a target that’s too hard to hit, you’re creating a sense of entitlement. Employees will assume they don’t need to work so hard because the next target will be lowered, too, he explained.

The author is a Chicago-Ill.-based freelance writer. She can be reached at anagro@giemedia.com.