What Incentives Can and Cannot Do

Incentive compensation.  Powerful stuff when used well and - unfortunately - potentially even more powerful when misused and misdirected.

How do you know when an incentive plan is a good idea and when it is not? 

For starters, it is important to have a sense of the circumstances you are fixing to drop them into and the objectives you (or the prospective plan "sponsor") hope to achieve by putting them in place.  If you don't, start there.

Next, you'll need to face up to the reality that there are problems which incentives cannot fix (and may even make worse).  What follows is my own list of what incentives can and cannot do.  Readers, I suspect, will have their own lists as well - which I would encourage them to share here too.

Things Incentives Can Do

1.  Incentives can focus.  Incentives call out top priorities for employee attention.  This is one of the most potent capabilities of incentives (assuming you are clear on the implications and consequences of that "focused" attention).

2.  Incentives can guide.  Incentives are communication tools, pointing employees to where their efforts can create the most value.

3.  Incentives can share the rewards of success.  Incentives provide a mechanism through which employees can share in the economic success they help create.

4.  Incentives can weaken silos.  By tying groups together with shared performance metrics and reward opportunities, incentives can encourage teamwork and collaboration across business or functional lines.

5.  Incentives can promote development.  Incentives can help drive and reward the development of critical skills and capabilities.

Things Incentives Cannot Do

1.  Incentives can't fix broken organizational structures and processes.  If your structure and processes are so bad that you have to dangle money to "motivate" people to work around them, you'd be well advised to bring resources to bear on the real problem (which is not a lack of rewards).  Barring that, better have a really clear idea about the type of workarounds people are likely to attempt in pursuit of that extra cash.

2.  Incentives can't fix bad job design and staffing decisions.  Incentives are not an alternative to designing and staffing work roles in ways that make good performance possible and even likely.

3.  Incentives can't serve as a substitute for enforcing policies and job requirements.  Following policy and meeting job requirements should be considered a condition of employment, not something you "purchase" with extra compensation in order to avoid confronting those morale-depleting slackers.

4.  Incentives can't get you off the hook for providing regular feedback to employees and correcting work efforts that are off the mark.  And THAT is because...

5.  Incentives cannot manage your employees for you (honestly, this doesn't even work with most sales jobs) and they are not an alternative to setting and communicating clear performance expectations.  Although there will seemingly ALWAYS be managers who want to give this a shot. 

What can you add to these lists?

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 to a range of client organizations.  Ann serves as President of the Twin Cities Compensation Network (the most awesome local reward network on the planet) and is a member of the Advisory Board of the Compensation & Benefits Review, the leading journal for those who design, implement, evaluate and communicate total rewards.  She earned her M.B.A. at Northwestern University’s Kellogg School, is a foodie and bookhound in her spare time (now reading Brad Stone's "The Everything Store: Jeff Bezos and the Age of Amazon").  Follow her on Twitter at @annbares.

Creative Commons image "Yellow Light" by wfyurasko

Comments

[Tony Bergmann-Porter]

"Incentives call out top priorities for employee attention. This is one of the most potent capabilities of incentives (assuming you are clear on the implications and consequences of that "focused" attention)."

Exactly so. Any incentive designer must make a definite point of (1) identifying ways in which participants could game the system and ensuring that the program design prevents them from doing so and (2) identifying perverse incentives arising from the program design and taking steps to eliminate or mitigate them.

[Ann Bares]

Tony,

Well-said. And, unfortunately, it too often falls upon the incentive designer to do (1) and (2) while serving a line management sponsor who wishes to use the incentives to accomplish things that they can and should not. But that's why they pay us the big bucks, right? (wink wink)

Thanks for the comment!

[Margaret O'Hanlon]

Ann, you asked for what we can add to the lists. Here's one for the second list. Incentives can't replace or delay career development. They always seem to take priority in the list of HR upgrades, but many employees are as, or more, interesting in learning, growing and getting promoted. It's important to assess what your group's preferences would be. It's no fun to do all that work on an incentive plan, when employees look at it and say, "Yes, but when we going to know what our career prospects are? Do I have a future here?"

[Ann Bares]

Margaret,

Good one and a helpful reminder that its worthwhile taking the time to understand employees' top interests and concerns before assuming that cash incentives are the best possible "answer"!

Thanks for adding to the list!

[Dan Walter]

Great article. A couple of thoughts.

I always tell my clients that it isn't that incentives don;t work, it's that they work too well. The key is understanding, before you implement, exactly what people will think they are designed to do.

Also, incentives cannot ensure people will stay on the path you desired to get them to their goal. Like Google maps, they will be provided various routes. Some will be faster, some will be easier, some will be more familiar, some will have better scenery. If you want them to stay on your desired path you need to stay in the car with them and navigate. Otherwise, hope you defined the destination well enough and wait for them to arrive.