The Tricky Business of Incentives

An article published by offers a fresh look at the value and dangers of incentives. Author Kellye Whitney says, “Think of an incentive like a gun.” Like a gun, incentives can be dangerous if placed in the wrong hands, and improper design or implementation of incentives can backfire. Compensation of any sort can be a tricky motivator for employees. Let’s take a closer look.

Focusing on a total rewards philosophy actually works best with regard to incentive use. Don Lindner, manager of practice leadership at WorldatWork, says that incentives are only a piece of a comprehensive employment value proposition that may include five elements:

Compensation, which includes base pay and cash incentives; the beneftis program; work-life; career and development; and performance and recognition.

Compensation and benefits can have strategic advantages. However, an organizations’ culture must support them. In order to do that, Lindner said talent managers must understand the big picture and not look at incentive plans as a primary business driver. Cultural or leadership issues are usually to blame for negative behavior or results following incentive activity. Incentive plans are business tools. If the tool is utilized properly, it will encourage the proper results and behaviors from your employees.

Talent managers must establish the kinds of behaviors that the organization wants to promote. Once these have been recognized, talent managers can build the incentive plan and weigh them accordingly. It’s crucial that the primary business drivers are well understood. Only then can an incentive plan be developed to reward those stated behaviors and associated results. “There are two critical areas of an incentive plan design,” said David Wise, senior consultant for the Hay Group. “One is the performance measures, and two is around the incentive mix. Poorly ddesigned incenitve plans focus only on the desired outcome without thinking enough about the behavior it takes to get there and the impact those behaviors can have on other business outcomes.”

Another key to incentive plans is differentiation. Not everyone deserves incentives, but the key employees who are going to drive a business over a long-term period of time DO deserve incentives. Differentiation requires that talent managers measure employees on things that have bottom-line impact for the organization. The factors that talent managers should pay attention to are the factors that directly relate to how an organization makes money and how it creates value.

Senior level employees will have a different impact on overall business performance than mid- or lower-level employees, but incentives for all levels of employees should refer back to the overall success of the organization.

Bringing everyone into the incentive mix helps to get employees out of their silos and encourages them to care about what’s happening in other parts of the business, which can enable teamwork and promote innovation and collaboration.

Measurement is also important. Michelle Smith, vice president of business development for O.Co. Tanner, said tracking an incentive program can inform leaders how well they’re doing in giving candidates progress feedback. “This is a great way to spot problems, challenges and veer to the left or right before they become big issues,” she said. “It also gives you great data on: How effective is the program? What course corrections do we need to make? And you’re doing all of this dynamically while the program is running so you can continuously improve it.”

The audience affected by incentive programs is also important. Top performers typically have the most to gain from incentive programs. However, there are other employees who can contribute to or damage goal attainment for the organization.

Talent managers must clearly articulate the goals the incentive plan is supposed to achieve, and Smith said marrying an incentive plan to a recognition program can create a safeguard to ensure that happens. Further, the overall incentive program will be stronger, more expansive, and better able to avoid unintended consequence or program misuse.

When it comes to incentives, you have two types: tangible and intangible. “Non-tangible rewards are far more effective in actually increasing performance and the success rate of attaining your goals than cash rewards for many reasons,” Smith said. “With a non-cash award, an item of merchandise, travel or something like that, you actually visualize that award, and that helps you achieve it. Non-cash awards also have more trophy value.”

To read more about the benefits of a properly designed incentive program, or to learn more about how tangible rewards are more efficient than cash rewards, click here to read the full article.

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