Cash incentives have a mixed reputation and - let's be honest - probably deservedly so. Under the right conditions and when done well, incentive plans can be a powerful positive component of the employment relationship. When poorly conceived and placed, however, they not only bring nothing to the table, they have the potential to backfire in unexpected and unhappy ways.
Incentives are not the first move fix-all that many managers consider them to be. In fact, they typically deliver positive results only under the right circumstances. What are the conditions for making incentives perform for you? Here are three key ones to consider:
1. Ensure a solid base foundation. It's tempting to implement incentives in lieu of fixing base salary problems, to assume that incentive pay will get you off the hook for addressing salary issues and inequities. It won't. In fact, it can make matters worse. This isn't to say, in today's economic circumstances, that you must raise everyone's salaries to market levels or beyond before proceeding. It does mean, though, that you must have your salary act together - a strong salary structure and set of decision guidelines atop a sound, objective and unbiased job valuation method. Variable pay must rest on a solid foundation of faith and trust in order to be motivating. Overlaying incentives on base pay practices that are widely perceived to be unfair is like trying to erect a building in the middle of a toxic swamp. Nowhere to go but down.
2. Remove major obstacles to performance first. Of course you begin any incentive design effort with a clear idea of your objectives - the results you intent the plan to accomplish. Before going further, however, it is important to deeply understand the nature of the performance problem. What is preventing you from achieving these results today? Do employees have the knowledge, skills and abilities needed to make them happen? What kind of crosswinds do they face in trying to do so? What obstacles has the organization put in their paths? It rarely makes sense to incent people to chase improvement goals when the organization has been structured and staffed in a way sure to thwart their every effort. We call that a pay-for-frustration plan.
3. Commit to follow through. The biggest lesson coming out of the CARS (Consortium for Alternative Reward Strategies) research, the most comprehensive research ever done on broad-based employee incentive plans, was "design your plan well, but do a great job of implementing it". Great implementation means taking all the steps necessary to make sure employees understand the plan objectives and measures, and what they can do each and every day to influence them. This means a commitment to ongoing communication (with managers, not HR, in the starring communication role) - not just at roll-out, but through the entire plan life cycle. Not ready to do this? Then the likelihood that incentives will truly perform for you just dropped. A lot.
What would you add to this list of the conditions for incentive success?
Ann Bares is the Founder and Editor of the Compensation Café, Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting services to a wide range of client organizations. She earned her M.B.A. at Northwestern University’s Kellogg School and is a bookhound and aspiring cook in her spare time. Follow her on Twitter at @annbares.
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