Well-designed and well-implemented incentive plans can be an important tool for overall company success, but they also have the potential to be ineffective and even damaging if not carefully thought out. Poorly designed incentives can have too much discretion, too much complexity or just too many measures that can undermine their power and advantage, and they can become just another way to distribute pay.
Before you even consider incentives, make sure you know the company’s strategy and the critical measurements of success. You will need to know the specifics regarding what you want to achieve, what kinds of improvements, behaviors and outcomes do you want; why aren’t these improvements happening now and what’s preventing them from taking place; what obstacles to the outcomes will employees face, how will employees respond to and try to overcome these obstacles, and is this what you want; Do employees have the skills, experience, systems and support they need to overcome these obstacles and if not, what is lacking?
The potential incentive must be big enough to get the employees’ attention. Incentives can create a focus on results, but you have to first get the employee’s attention. Because the opportunity for financial rewards motivates some more than others, your incentive plan will have a greater chance of success if you carefully define what the size of the opportunity must be in order to get the majority of your employees’ focus.
The performance or results required to earn the incentive must be within the employees’ control or significant influence and should be perceived as achievable with some extra effort or stretch. It should be easy to see and understand the relationship between one’s effort, the results of that effort and the reward. The incented performance needs to be perceived as a desirable, stretch goal to get and keep the employee’s attention. The payout must be worth the effort required to “stretch.” The actual payout after the final measurement is made needs to justify the attempt that was made to achieve the full objective.
Develop robust tools for performance reporting so that the employee participants always know where they stand in relation to their goals and payouts. The payout should be forecast as the performance period proceeds in order to keep the employees’ focus on the desired outcome. Too much subjectivity in the measurements will turn a Plan into a surprise bonus. The sources of the measurements should be available to every participant on a regular basis and calculations for determining payouts must be simple and easy to understand.
Incentive plans will also be more valued and accepted by employees when they are a compliment to an already competitive base salary plan. Incentive plans are not meant to remedy non-competitive pay issues. Finally, critical factors for a plans success lie in keeping it simple and ensuring good plan communications.
Incentive plans, or any other reward vehicles, cannot drive the performance-improvement bus alone. Unless you identify and remove the barriers to performance, and create the setting in which performance improvement is possible and even likely, throwing incentive money at the problem will likely have little positive impact and could produce some very real negative consequences.
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