Incentivizing Employees

Incentivizing Employees

By Sherry Lutz Herrington

Incentivizing Employees

It’s no secret that finding good employees right now is a challenge and keeping the ones you have is a must.  The question is, how do we do that?  In today’s labor market, following “the great resignation” as it’s been dubbed, there is high demand for job satisfaction.  You can no longer simply pay minimum wage, treat people like garbage, and expect them to be loyal and hard working.  

People have realized there is more to life than work. 

 There is also work satisfaction, and it matters.

Depending on the industry that you’re in, you may have been hit harder than other businesses.  I see medical professionals, contractors, restaurants, and other hospitality businesses struggling to fill vacancies.  Partially because of the work circumstances and partially because of the increase in demand in that field.  

Other businesses that are remote or can offer remote work are finding it easier to satisfy their employees.  But you still need to have a culture that is attractive and keeps people happy. And you need to have an attractive compensation package.

I remember back in the late 90’s I worked for a company that (for a while why things were good) bought us smoothies once a week and sent in a chair masseuse once a month.  They were little things, and maybe it wouldn’t have mattered if they hadn’t done them, but I still remember them.

What I’m getting at is that you have to find ways to incentivize your staff.  It could mean very different things depending on the business you’re running. 

Smart businesses are finding creative ways to attract and keep quality employees.

Yes, paying good wages is important.  Know what minimum wage is in your area and be sure you compensate your employees relative to that based on the type of job and the experience and quality of the person’s work.  Sometimes it’s hard to know before you hire someone if they are truly qualified or if they are a great fit for your situation.  Be sure to have a 90-day probationary period so they know you are vetting them to see if they are everything they convinced you they are.  Nothing worse than being oversold.  Trust me, I’ve been there and done that.

I don’t recommend overpaying. I don’t think it’s smart business.

For a few reasons:  

  • First, if the person doesn’t turn out to be as good as they claimed, but they are still worth keeping, you will be paying them more than they are worth.
  • Second, if they turn out to be super fantastic and you promote them quickly, you can always raise their pay.  
  • Third, if business drops off (and right now we are living in uncertain times so I wouldn’t count on things staying as they are) then you are stuck paying more than the company can afford.
  • Fourth, if you have existing employees who are being paid fairly, and you bring someone new in who is paid more than the existing ones but does the same job, there will be resentment within your staff.

However, that doesn’t mean there aren’t other ways to keep your team dedicated and loyal.  

Pay is not the only part of a compensation package.  Look at other ways to reward your employees that will motivate them to stay. It will also cost you less than wages which you will have to pay payroll taxes. 

Incentivizing Employees

Other incentives that are tax deductible to businesses are a great way to offer more than your competition to entice new employees and retain existing ones.

For example, even small businesses can often afford to offer some kind of retirement benefits.  In the state of California it’s now mandated that you offer something. Depending on the size of your business, the mandate may not start until the summer of 2022.  If you just want to offer your employees the state plan, that is the least you are required to do. My understanding is that it’s not really that great.  But there are other alternatives.  For example, SIMPLE IRA’s are not hard to set up or manage and are fairly inexpensive.  Yes, you need to offer your employees a percentage match, but they may not all take advantage of your generosity.  Even if they do, it’s a relatively inexpensive benefit that can give you an edge over your competition when hiring.  If a SIMPLE plan doesn’t appeal to you, there are others such as traditional IRA’s, 401K’s and Roth 401K’s.  Talk to a good financial advisor and your tax professional to see which offers you the best tax benefit as well as which makes the most sense given the number of employees and the volume of your business.

Another great perk is to offer your employees vacation time.  Everyone loves paid time off, and they need it, too.  This will build your company culture, which is a huge part of what makes your company attractive to the right kind of people.  You don’t have to offer huge amounts. As I stated before, that is not smart business.  But you can easily build it into your budget and set reasonable parameters.  For example, most employers require that an employee stay at least one year before they are eligible to earn and redeem vacation time.  Fine, set the time frame that seems most reasonable.  Also, you can have an employee accrue their vacation hours based on the hours they work.  You don’t just have to give everyone 3 weeks’ time off.  In fact, I wouldn’t recommend it.  Again, match it to their hours.  For every hour worked they earn a fraction of an hour of vacation time.  This is a great way to address part-time or hourly employees whose time may vary.

If sick time is not required in your state as it is in California, then I would recommend you offer at least some.  Be sure to follow any laws on what is considered sick time and when and how much can be taken.  You do not want to set yourself up to be taken advantage of by any unscrupulous employees.

Beyond these basics, I encourage you to get creative.  Think outside the box.

A lot of companies offer paid holidays.  It comes down to time off with pay so that your employees can spend time with their families or relaxing without stressing about not having enough income to pay their bills.  If you have part-timers or hourly folk, then it can be based on the number of hours they work, not necessarily a full eight hours.

Medical insurance is always appreciated but it can be costly to small businesses. Be sure to research this option thoroughly before choosing it.

Bonuses can be an excellent way to build loyalty.  However, I think the trend these days is toward paying profit sharing instead of bonuses. When I offered bonuses, there was no formula to decide how much to pay.  They were paid once a year, typically at the end of the year, if we’d had a good year.  I wouldn’t recommend paying them if you have not been profitable.  Also, once you start paying them, your employees will come to expect them.  Depending on what you can afford, they are typically a significant amount of money.  It can be hard on cash flow to have to pay them all out at the same time.

Incentivizing Employees

Instead, consider paying profit sharing.  I believe this is where you can truly reward your employees and build loyalty.

You are not giving up any ownership of your company, and if profits drop, then so does what you pay out.  How much you pay and when you pay it is a personal choice.  I do recommend you think it through carefully. You need to protect your bottom line at the same time.

Evaluate how much you need to make in profits to cover your own needs as well as what the company needs to stay solvent and grow.  For example, if you are growing quickly and have a healthy net profit, then is it time to invest in additional assets such as equipment or a larger facility?  If you give away all your profit, then you won’t be able to reinvest as the company needs.  Also, you may have debt that needs to be repaid out of those profits.  And of course, you need to be able to draw enough off the profits to cover your own needs and reward yourself as the owner.  I’m not suggesting you offer profit sharing to the detriment of the company or yourself.  Set a parameter that protects both.

Typically, a percentage of the net profit is offered as profit sharing to the employees.  This might be a set percentage that gets divided among all the employees.  Whether it gets divided equally or not is up to you.  Having a set percentage of the net profit that gets split based on the number of hours worked makes sense. Especially if not everyone works the same number of hours or hours vary.  Another variable is whether you pay more to higher paid employees or if everyone gets the same amount.  Personally, I pay based on hours worked, and each person gets a percentage of the amount set aside that matches their percentage of the total hours worked.  I believe everyone’s contribution to the overall profitability is equally important no matter their job title.

Profit sharing also protects your company. If profits go down, you pay out less. But you are still able to keep the number of employees you need.

If you pay more in up front wages and times change, you may have to lay off employees, which hurts morale.  It can also make it difficult to maintain the quality or quantity of work needed to turn things around.

The other piece of this puzzle is how frequently you pay profit sharing.  It could be annually and just replace bonuses.  However, you will have the same drawback of all of it being due at once. In the book Lunch with Lucy, author Sherry Stewart Deutschmann argues that smaller, more frequent rewards build loyalty much effectively than annual payouts.  

If employees receive large amounts only once a year, it doesn’t build loyalty because they soon forget about it.  However, if they receive smaller rewards more frequently, they are reminded that they are important and their contribution to the company matters.  This builds loyalty.  Additionally, because they receive a percentage of net profit, they are motivated to help build the business, control costs, and feel a sense of ownership and responsibility.  All super ways to keep employees happy and singing the company praises.

When your current employees are happy, they are much more likely to tell their friends what a great place they work. So when it’s time to hire new workers, they will be a good resource to help you find excellent team members. 

Stay abreast of your market and what your peers are doing. It will be helpful to know what is working for those who have loyal staff.  It doesn’t mean you have to match or exceed what they are offering. It just gives you information to create your own compensation package that will make your company more appealing to possible candidates.

Attracting and maintaining quality employees is a conscious effort.

In today’s labor market you need to be cognizant of what will make your company a desirable place to work.  Times have changed, and you need to change with them.  Of course, the almighty dollar is generally the most important factor for people. But it doesn’t all have to be offered as a large wage, which might be detrimental to your bottom line in the long run.  Get creative and come up with ways to incentivize your employees and build loyalty in the long run.  This all becomes part of your company culture. You can create a place where people are excited to come to work and contribute to the success of the company.

Whatever you decide to do, remember to have a human resources professional confirm you are doing everything legally.  Put everything into your employee handbook and update it regularly.

Sherry Lutz Herrington is the owner of Sherrington Financial Fitness, a business consulting and accounting firm specializing in strategic business planning and solid financial accounting for businesses. She is also the author of Strong Women Thriving (https://strongwomenthriving.com/), a blog which focuses on empowering women to be financially savvy, particularly after experiencing financial abuse. Sherry is currently writing a new book that both shares her personal story and addresses financial abuse. She can be reached at hello@strongwomenthriving.com.

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