Reverse the Purse: Get More Benefit from Investing in Spot Awards than Annual Incentives

WorldatWork, Deloitte Consulting and Vivient Consulting recently released results of an October 2013 survey of more than 350 publicly traded companies, 190 mostly large private, for-profit companies, and 175 nonprofit and government organizations. Results show employee incentive plans (as they term them) are alive and well (see the chart below and click through for the full report to see the full definitions for each of type of program).

Considering the type of organization, I can’t say I’m surprised at the balance or use of the specific program by organization type. That makes sense to me. What I don’t understand is the comparatively lesser use of spot awards across the board as compared to annual incentive plans. The survey defined the terms as (quoting):

• Annual incentive plan: A pay plan that rewards the accomplishment of specific results. Rewards usually are tied to expected results identified at the beginning of the performance cycle. Unlike bonuses, they are not primarily discretionary but may have a discretionary component.
• Spot awards: Recognize special contributions as they occur for a project or task, generally accomplished in a short period.

While there is value to annual incentive plans, so much more immediate benefit can be derived from reversing the investment levels in these programs. Why?

With a focus purely on results, annual incentive plans can result in unintended consequences because they can unknowingly encourage bad behaviors. These can include gaming the system to ensure results are met, but potentially not exceeded. Think of a sales executive who has achieved his numbers for the year (thereby assuring his annual incentive plan bonus) choosing to delay a contract until the next year. Or, as we saw so often in the last few years, a desire to deliver results at all costs, regardless of how those results are achieved. Think WorldCom, Enron, etc.

A focus on spot awards, instead, should recognize, reinforce and reward the demonstration of desired behaviors as well as results, balancing the way in which results are achieved with the results themselves. The immediacy of spot awards is also far more memorable and impactful for employees, helping employees know what is most needed for success and encouraging them to repeat those behaviors again and again. Additionally, research conducted by Harvard Business School professors Teresa Amabile and Steven Kramer (and published in The Progress Principle) shows that the most powerful motivator for employees is making progress in meaningful work. That’s why frequent, timely and specific recognition drives business results faster and more deeply than annual incentives.

Again, both approaches serve a valuable role, but consider switching the emphasis and investment.

What incentive approaches does your company pursue? Which do you find most effective?

As Globoforce’s Head of Strategic Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. His articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin, Montreal and Boston. Follow Derek on Twitter at @DerekIrvine.

Comments

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Not the same but similar ---- Netflix, Lear, and a few others have stopped giving merit increases --- they just adjust when they need to in order to make sure salaries keep up with market. They give bonuses instead. Not using the full spectrum of recognition awards --- but maybe moving in that direction?

[E. James (Jim) Brennan]

Spot awards are agile and allow supervisors to respond immediately to current needs and new circumstances. Annual incentives tend to be ponderous dinosaurs frozen in time but beloved by CYA-conscious executives.