Why Most Incentive Plans Fail—and How Thoughtful CEOs Get Them Right

I suspect that the CEOs in our audience are likely to agree that crafting a truly effective incentive compensation plan is simultaneously one of the most difficult, and one of the most important, tasks that a small business CEO will face.

Charlie Munger is famous for saying “Never, ever think about something else when you should be thinking about the power of incentives.” He's also said “I think I’ve been in the top 5% of my age cohort, all my life, in understanding the power of incentives, and all my life I’ve underestimated them.”

But why is it so difficult to craft a truly effective incentive plan? Based on many years of experience putting them together myself, here are just a few of the challenges that I faced:

1. Avoiding unintended consequences and people "gaming" the system
2. How to balance individual goals vs. company goals vs. departmental goals
3. How to incent people on company goals when the achievement of those goals falls largely outside of their control
4. If or how to change a comp plan if circumstances change materially within any given year
5. How to manage changes in goals & targets across any two given years
6. The balance between simplicity & detail
7. How to handle inherited employees whose salaries may fall outside of company-wide pay bands

To help me untangle each of these challenges, this week I'm joined by Stacey Carroll. Stacey has spent substantially her entire career leading HR organizations across a wide array of companies, with a specific focus on compensation & benefits. She has also spent the past 14 years leading HR Experts on Call, a company she founded where she acts as an interim HR leader for small and medium-sized businesses.