Incentive Compensation - Linking Employee and Owner Objectives

Article excerpt

Incentive Compensation - Linking Employee and Owner Objectives

Incentive compensation is not new to real estate. The incentives are very direct in sales and leasing: sell more, lease more, and make more.

In property management the nature of the work is different. Prior to 1987, income incentives in management were sometimes structured around the tax benefits of equity participation. Some owners provided managers with non-recourse loans to buy equity in a project. This provided immediate tax benefits, which no longer exist.

While equity participation can still be an effective long-term incentive based on appreciation of a property, incentives also must focus on the realities of today's economic climate in commercial real estate. Management incentives should concentrate on operations, linking compensation of individuals to their success in achieving the property owner's and corporate goals.

Properly structured, incentive compensation is a powerful tool in the implementation of business strategy. Property managers play a key role because they have day-to-day control over operations and their decisions can have a great effect on profits. Recognizing the impact of good management with incentives makes good business sense.

Benefits of incentive compensation include:

* articulation of corporate objectives and priorities;

* greater employee motivation;

* increased internal communication;

* effective recruitment and retention of high-quality employees;

* improved employee self-awareness; and

* stronger employee advocacy for the company.

Building an incentive program

An incentive compensation program measures performance against predetermined goals. Incentive pay is predetermined and earned based on the level of achievement in meeting these goals. The premise is to place highest priority on activities that lead to the achievement of the property owner's and corporate goals.

Effective incentive compensation programs begin with a clear understanding of the owner's goals for the property, as well the owner's risk profile. Only then can an operational strategy be mapped and responsibilities assigned for tasks that, step by step, will achieve these goals.

Incentives then are based on the operational strategy and can be linked to meeting budgetary goals or the achievement of specific tasks, such as keeping a contractor on schedule, renewing leases, or filing accurate reports in a timely manner.

Key considerations in designing incentive programs are:

* timeliness of rewards,

* objectivity of review criteria toward incentive pay,

* employee control over achieving incentives, and

* ease of administering the incentive program.

Timeliness

Incentive compensation programs are based on behaviorist psychology - a quick reward for good behavior will encourage further good behavior.

Much of the management literature on incentive compensation advises against incentives based on time periods in excess of a year. If the reward is given too long after the desired performance, the relationship between the two is rarely established. When the relationship between behavior and reward is clear, both the employee and company benefit.

A case in point involved a large apartment management company where executive responsibilities included touring apartments as if the executives were seeking units for themselves. The resident manager did not know the executive's relationship to the company. If the resident manager performed the tour using techniques that had been provided in formal training, he or she was rewarded on the spot with $100 and told why.

This informal incentive had impact far beyond the value of a $100 bill. Word of the incident invariably spread and, in a way, the entire company became a little better than it was the day before. …