This article by Cathy Ivancic appeared first in the “Ownership Advantage” column of The ESOP Association’s newsletter.

sweet pie incentive“Eat your vegetables and you can have dessert.” The purpose of this well-known incentive is pretty clear. The person, often a child, earns a reward for doing something they don’t wish to do in order to enjoy get something they actually want. Is this how short-term financial incentives, bonus programs, and recognition are supposed to work in an ESOP-owned company? Is it about compliance or should it be something different?

Perhaps you’ve had the opportunity to observe the ugly underside of incentivized behavior. It isn’t pretty. Whether it is a child gulping down a fistful of green beans or a work team “gaming” short-term results to earn incentive — the external reward does not always produce a meaningful commitment to shared goals.

The incentive, or bribe, inspires short-term compliance but it does not engender any internal motivation or understanding about the big picture. It doesn’t help the next generation of employee owners learn how their jobs contribute to performance. It doesn’t help employees to be flexible when the business needs change. Even worse some would argue that the behavior encouraged by a bonus or financial incentive is now contingent on the reward. The incentive itself may have undermined the development of internal desire to take personal responsibility – just the opposite of what most of us would call “acting like an owner.”

Human beings can easily be lulled into “thinking like a hired hand” rather than taking on shared responsibility. Even in the most effective ownership cultures, there is always a need remind people about the dynamic relationship between daily actions and business performance. Let’s face it ESOPs alone are not particularly good at giving employees timely feedback on what activities drive long-term wealth building. The rewards for ESOP participants are years, sometimes decades, away from job-level actions.

Short-term incentives can cut both ways for employee-owned business. Sometimes, a bonus program is an important and powerful component of strengthening their ownership culture; sometimes it becomes a part of an unwanted cycle of entitlement and short-term thinking. Below are some of the keys to bonus success we’ve discovered in our 25 years of consulting with ESOP owned businesses

Good Design

All incentives are imperfect in design; all have weaknesses and strengths. There are, however, key elements of good design that help smooth the path of implementation. For example, making sure that the bonus pays for itself is important but it is not sufficient for incentive success. Some company leaders tinker with the details of design while ignoring the dominant role of implementation. These leaders are surprised to find that a carefully designed bonus program can be rendered completely ineffective with poor communication. Oddly enough, a poorly designed bonus program with obvious design flaws can often be made very effective with good communication.

Clarity of Purpose

There really isn’t a choice when an ESOP is involved. The only reason to have an incentive is to help grow shareholder value. Agreeing on how we think the bonus program or incentive will do this is an important step in success. Sometimes a bonus program or incentive has unwittingly morphed into something other than what was intended. Even worse, a bonus cannot be effective when executive leaders think it has one purpose and employees think it has another.

If your short-term bonus program has morphed into a holiday gift, an entitlement, a required part of compensation or an impossible dream, it may be time to consider what the business needs to get out of this incentive. Perhaps the business needs to attract or retain talent; perhaps the business needs more awareness about how job-level performance connects to ESOP rewards. Your incentive history, your business goals and individual performance management processes will determine a starting point for how you communicate your purpose. In our consulting work we help company leaders to build an action plan for stronger agreement about why the business has short-term incentives.  An effective implementation plan recognizes that meaningful agreement is a process, not a one-time event.

Set Ownership Expectations

Many ESOP-owned companies want employees to move from “thinking like hired hands” to “thinking and acting like owners,” but they are not so clear about what this really means. Confusion about corporate decision making roles and fuzzy ownership responsibilities distract from business goals. An incentive can be a centerpiece for communicating expectations about ownership behaviors or it can be a place where all the confusion and misperceptions are played out. Eliminating ownership misperceptions needs to be high on the list of priorities in a meaningful plan for successful implementation.

Build Business Literacy
Short-term incentives are different in an employee-owned context because they are a means to an end rather than the ultimate reward. Bonus programs or incentives create an excuse to have a routine two-way conversation about performance. This dialogue helps employees to learn how their job impacts the business.

The implementation of a frequent (daily, weekly or monthly) dialogue takes many forms. In some companies it involves visual tracking and rapid improvement initiatives. In others it may be regular meetings, mini-contests or guessing games. The conversation may take the form of open-book management – where financial statements or metrics are the scorecard for the dialogue. It may also take the form of tracking non-financial job-level goals. The key here is not the form of the dialogue (or the level of disclosure) but the routine commitment to teaching people how their part of the business contributes.  Job-level performance metrics — like on-time delivery, successful ship rate, meeting deadlines, or quality metrics – can be the building blocks for business literacy. A commitment to business education and coaching for managers will deepen the quality of the conversation.

Can you bribe people to act like owners? No, it isn’t that simple. A healthy ownership culture demands more than simple compliance, it requires a level of shared understanding about business goals. Short-term incentives can help make ESOP ownership come alive, but only when they are part of clear implementation plan.

To develop and communicate incentives that are a meaningful part of building ownership thinking in your company contact Cathy Ivancic at 330-896-7285 or