Why are companies spreading incentives to lower levels in the organization?
From 1900 through to the financial crash of 2008 was the century of making senior management rich through dramatic incentive plans (IPOs, LBOs, stock options, etc.). Now (the decade of the 2010s) is the decade of spreading incentives throughout the organization.
About half of all US companies have recently spread incentives to lower levels of management. These incentives go by different names (gainsharing, group incentives, profit sharing, suggestion programs, key contributor programs, etc.), but they all reward non-executives for their contributions to the value of the company.
Companies and executives are realizing that executives are not the only ones who create value. The suggestions of a line supervisor can save a manufacturing company millions of dollars.
Interestingly, senior executives that have their own incentives to increase the value of the company are driving adoption of incentives for lower-level employees. The executives feel that the best way to make their own bonus targets is to set up similar targets for the rank-and-file.
Another ways to say this is, “What’s good for the goose is thus good for the goslings.”
Research has also shown that senior corporate executives do not make most decisions that affect profits. While senior executives do make some major capital expenditure and advertising decisions, lower-level staff make most pricing, expense, and customer interface decisions. Looking at the dollar value of decisions, senior corporate executives in a typical major company affect only 20-35% of annual cash flow.
A remarkable 65-80% of the company’s cash flow is decided by mid-level management and other employees.
Why should you provide incentives to non-executives? The reason is that non-executives actually run the company. If you incent the people who actually run the company on a day-to-day basis to create value for the company, then the company will prosper.