How to set up an incentive plan

Some producers confuse incentive plans with profit-sharing plans. Although both reward employees, they are quite different. A profit-sharing plan shares the profits of the business with all employees, whereas an incentive plan rewards individual employees for their individual performance.

A good incentive plan recognizes that individuals can make a real difference in the operation and its profitability. During my 25-year career, I have seen a lot of incentive plans, some of which worked well and some did not. Following are six items that you must consider in order to develop a good incentive plan for your dairy farm business:

1. Design it around individual employees.

Look at the baseline performance for each job description and establish a realistic goal that an employee can reach to improve the profitability of the operation. Then, determine how much the improvement will add to your bottom line and share that increase with the employee. How much should you share? Some experts say you should split the additional profit with the employee.

2. Design a program that the employee can control.

Incentives must be tied to something employees can control, such as improving the conception rate or reducing the death loss in calves.

3. Set realistic goals for incentive levels.

Set realistic goals and stick with them. Making changes to the incentive program after you implement it can create distrust between the employer and the employee. The employee may view the change as an attempt to take money out of his/her pocket after meeting the goals established by the employer.

4. Keep the program simple.

Each employee should be able to calculate the level of his bonus without having to make any complicated calculations. Resist the urge to tie the incentive program into the net income of the business. Otherwise, the employee may think that the program can be manipulated by making additional purchases at the end of the year.

5. Pay incentives often to keep the employee's interest.

The more an employee is rewarded, the more support you give to the employee, thus increasing your chance of actually inspiring better performance. Quarterly payments work well.

6. Keep it separate from salary.

Don't use the incentive program to replace a portion of the employee's salary. Pay the employee a fair salary, and then reward the employee financially for improvement in the farm's bottom line through the employee's effort.

Other incentives
With some jobs, such as a mechanic or tractor operator, it's difficult to measure performance and therefore to establish performance-based incentives. For these workers, you may want to establish a set of goals that can be measured and attach a specific dollar amount to each goal.

For example, you have a mechanic who doesn't put away his tools, causing lost time for other employees trying to find those tools. Offer a $200 bonus each quarter for the tools being in their proper place on a specified inspection day each week or day of the month. Reward an employee a $200 bonus if the milking parlor is cleaned by 9 a.m. daily.

For more information, you can order the book "Employee Incentive Pay in Dairies." The cost is $12, plus $3.75 shipping and handling from Ag Executive, 115 East Twyman, Bushnell, Ill. 61422. Illinois residents must add 6.75 percent sales tax.

Darrell Dunteman, AAC, is an Accredited Agricultural Consultant and accountant with offices in Bushnell, Ill.