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incentive compensation can be of all kinds from cash profit sharing to gain sharing to discretionary bonuses stock options to outright equity etc if you look closely at how value is created in the company you will come to the conclusion the value is primarily created by incremental gains in something which is why today I would like to focus on gain sharing we've used this approach effectively because we believe in its premise ie if you as an employee contribute to a gain we will share it with you and if you don't produce again we won't gain sharing can be set up for all kinds of company areas let's look at a couple of examples mistake a manufacturer looking to reduce the cost per unit on its products the existing cost per unit for the manufacturer is $10.50 the production department is given an incentive to reduce the existing cost per unit they successfully reduced the cost per unit by 50 cents which when multiplied by the production volume leads to a gain of a half a million dollars this half a million dollar gain or a portion of it can be shared with employees participating in this specific game sharing program let's take another quick example say a company wants to reduce its labor cost its existing labor cost is 4 million it installs a game sharing incentive plan the employees responsible reduced labor costs by 150 thousand dollars which can then be shared the sharing percentage is always up to management but here's how it could break down company's share for profits and/or working capital could be 60% the overall company bonus pool could get 20% the manager responsible and get 10% and the employee group with the biggest contribution to the goal could get an additional 10% let's talk about designing incentive compensation in your company the first thing you need to do is set up benchmarks you need baselines on historical performance in areas you want to improve as well as target of where you want to end up these baselines can be measured not just against performance targets but also against a group of employees or against goals like accomplishing a strategic objective etc these can be measured with financial key performance indicators or with non-financial targets like process improvement or customer service trends etc the compensation could be determined based on various inputs or a predefined structure let's talk about implementation of this and what's involved for this we've developed a proprietary cascading framework that links everyone and their key performance indicators from the CEO to the company departments and in some cases the functions and processes and most certainly the managers and the employees next we ensure that key employee accountabilities and the key performance indicators are linked and then we connect these to predetermine incentive compensation incentivizing individual employees can be effective but it's only one part of the puzzle an individual is only one part of an overall chain of people and activities which is why we group the company hierarchy in multiple levels in this case Group one is the CEO group two the company Group three is the department group or the manager and group five are the employees etc by grouping the various levels it allows us to pick and choose who's included for incentive compensation for example a company write target if met could add incentive compensation to all employees whereas certain things may qualify for incentives for an entire department and others may provide specific compensation for the managers in that department while incentive compensation plans can be complex if implemented correctly they can be remarkably effective especially if you connect employee performance and the underlying gain to the right employee compensation rambaran capital helps companies like yours improve performance and sell for maximum value how ready is your company come see how you're doing get your free score and customized report in just a few minutes and no cost or obligation visit Reverend comm forward slash score you