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How to build an incentive plan for the accounting department
Or rather, should you build an incentive plan for the accounting department?

We want the best from every employee. So why not incentivize them? We want the best Loan Officers, Branch Managers, and CEOs. Enter incentive pay. According to research, incentive programs improve performance, and they do so by an average of 27%. There is one caveat, these plans must be selected, implemented, and monitored correctly.

The question of “how to incentivize” often arises from the premise that it is only fair to incentivize back-office personnel who provide critical support for those producing a net deliverable through some level of sales capacity. Those support employees help make the sale, and we all want to be “fair,” right?

Incentive pay seems simple - set a goal, achieve a goal, provide a reward - but people set up incentives incorrectly all too often. I want to talk about what it means to incentivize correctly.

First we need to look at the theory of motivation.

Incentives are created to motivate a change in behaviors. This accomplished by offering a reward opportunity. To be effective, each incentive scenario needs to meet four keys. Those keys are:

  1. The incentive needs to be contingent on clear, understood goals.
  2. The reward has to be valuable enough to get their attention (so movie tickets probably won’t do it).
  3. The employee needs the ability and skills to achieve the goal.
  4. The employee has to believe they can achieve the goal.

Sure, you can make an incentive plan without these keys, but if you do, the probability of achievement is diminished. Not only, will achievement suffer, but you may also incentivize unintended consequences. On the other hand, the Law of Unintended Consequences could just as easily reduce employee yield.

So back to the original question: Should you incentives the Accounting Department?

Typical corporate goals will not fit these criteria for a back-office accounting position. So we can immediately see that bonuses or incentives based on typical corporate goals such as Return on Assets, loan Growth, Delinquency, Charge Off, Net Capital ratio, or Efficiency ratio will not provide any additional motivation.

Can accounting personnel be motivated by a team goal?

What about a goal of closing the month-end books within 10 working days following the end of the month? They have some control over that goal, although they have to wait on reports from other departments. To some degree things are out of their control, which might negatively affect their belief that they have the ability to accomplish the goal.

The average variable pay for accountants in financial institutions is 3% to 4% of base pay, depending on asset size. If you did offer this reward, would the days to close the month end books shorten? What if you stopped paying it? Would the days to close the month end books lengthen again? If so, did the incentive make a permanent change in desirable behaviors? Was it worth paying the incentive to temporarily shorten the days to close the month end books?

If the median annual salary for an Accountant I is $45,000.00, would the ability to attain a $1,350.00 incentive payout once a year really cause them to work more productively during the year?

No! It won’t.

It is important to look at the type of personality best fit for the position. The profile of an effective Accountant includes attributes like focus, analyzing, and attention to detail. They tend to be risk averse, and that’s a good thing. Just ask the accounting departments of Enron and World Com. Any additional productivity created by the incentive would have been given without the incentive payout with good management skills, alone.

What compensation approach do I recommend?

Which is more motivational: An opportunity to make an additional 3% or 4% annually based on goals they don’t control A base pay at market (or better if they are high performers), offering competitive benefits, and a manager who really appreciates their employees contributions.

Based on my experience, Option B is much more motivational for the profile of most back office operational employees.

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