Question and answer format
This high-end residential remodeler wants to reward project managers who bring projects in on time and within budget. Given that they have a great deal of control over on-time, on-budget project completion, it was a great idea to provide them with incentives to make that happen.
In order for incentives to really drive behavior, they need to include both an element of risk (they would earn less than their full market value if they didn’t earn the incentive) and potential for upside (they have an opportunity to earn more than their full market value if they beat their goals).
In addition, the incentive opportunity at target (for at-goal performance) should comprise at least 15%, and probably more like 20-25% of their total compensation. Moving to this sort of pay mix isn’t something to be done all at once — gradually over time is probably best — a value closer to 10% of base as an incentive opportunity in the first year would be a good place to start. Then in future years, base increases could be withheld to fund a more meaningful incentive opportunity.
Identify the measures and mechanics of the plan. If the incentive at target is $10k per year, and if a typical Production Lead is responsible for 5 projects per year, then the “plan” could be a simple as $2000 for each project completed on-time and on-budget, payable following customer sign-off. Consider adding some upside in the form of additional payments for savings vs. budget (e.g., $1000 for each $10,000 in savings) — but be careful about what behaviors are rewarded when choosing this path — you don’t want to jeopardize quality. Also consider paying a portion of the target incentive for almost-there performance (from our example above, you could reduce the payout by $500 for every day late, for example).
The possibilities are endless, but the principles are few.