Make Incentive Packages Work for You

-

Intentional incentives attract the right talent and keep them motivated

By: Michelle Klieger, Stratagerm Consulting

Incentive programs are formal schemes used by a company to promote or encourage employees to take specific actions over a period. They motivate employees to achieve certain goals in each period. It might be a simple system, where you pay employees a flat salary for coming to work. There might be a complex commission structure for the sales team or end of year bonus. Or maybe there are non-monetary incentives, like a corner office, a parking spot, or desired travel opportunities thrown into the mix.

Whether you realize it or not, all companies have incentive programs. When businesses spend time to create an intentional incentive system, it can attract the right employees and motivate them to reach stretch goals once on board. Companies that do not understand their incentive program might be accidentally encouraging behaviors that are detrimental to the business. They also might be missing out on meaningful and free rewards they can offer employees.

Harvard Business School Professor Brian Hall is an expert in organizational strategy, with a focus on performance management and incentive systems. He is currently writing a book with the working title, Cents and Non-Sense, where he explores common incentive systems in businesses and how those systems benefit or harm the businesses employing them.

Most Common Mistakes

No intention. For Hall, not spending time thinking about your incentive system is not only a wasted opportunity, but it harms businesses. People are always trying to maximize rewards while avoiding punishment. With the right incentives, CEOs can encourage companies to increase sales, deliver higher quality products, or innovate faster. The first step for leadership is to determine what they want most from their employees, then design an incentive system that supports that. No system is perfect, it’s what works for your company and industry.

Narrow incentives. Does the incentive system focus on individual growth or company growth? What is the right mix for your business? Piece rate pay or paying employees by the number of units produced are examples of narrow incentives. This payment system increases output, but often at the expense of the quality. Narrow incentives need to be balanced with border incentives. In this case, incentives that reward high-quality output, so employees work to more, high-quality products.

Some plant breeders get paid a bonus when they develop a new variety that improves upon a previous variety by a specific measurable metric. If the yield is 10% higher than the current variety, the bonus is paid out. This is a good example of a balanced incentive. It encourages new variety development, but it has a qualifier that prevents the breeder from only focusing on getting new varieties to market as quickly as possible. There is a quality metric as well.

Not using non-monetary incentives. Some problems cannot be solved with more money. In these cases, non-monetary incentives might be appreciated by employees. Another benefit of non-monetary incentives is that they commonly cost the company a lot less money than monetary benefits.

The New England Patriots have four parking spots close to Gillette Stadium reserved for players that excel at training camp. Each year, players compete during training camp. The players that rank highest in four specific categories are rewarded with a parking spot that has their name on it, close to the stadium entrance. Players are encouraged to work harder in the off-season and they are rewarded for their success with bragging rights for the entire season. This is very valuable for employees and very inexpensive for the Patriots owners.

The players that rank highest in four specific categories are rewarded with a parking spot that has their name on it, close to the stadium entrance.

Some seed industry people spend a lot of time on the road. While on the road, many people log more than eight hours a day. These long days are often rewarded with nicer than average dinners or even a bottle of wine. The company was going to pay for dinner, either way, but by going to a slightly fancier restaurant the employee feels thanked for the additional effort. The dinner does not significantly add to the cost of the trip and strengthens bonds between team members and builds employee morale.

Not considering how fragile or resilient the reward is. Resilient systems are when employees are regularly in the money. Stock options are a fragile reward. Even in bull markets, the median stock return is zero, even if the average is positive. That means that 50% of stocks are negative in value and not a good reward.

Impossible to achieve commission structures can be fragile. If the annual sales quota is so high that in the third quarter everyone knows they will not meet the goal, employees will give up. This hurts fourth-quarter sales and discouraged employees negatively impact the company culture.

Some complex pay systems are resilient and effective. In this example, a seed company offers its sales team a 5% commission in the first tier, 10% in the second tier, 15% in the third, 20% in the fourth, and 25% on the fifth. The fifth tier is nearly impossible to reach, but the first four tiers are achievable. In this case, the higher tiers should be included. Since employees can make more money with the bonus structure they are happy. The 25% commission rate is a nearly impossible to achieve goal that some people will always strive for. Humans tend to overestimate their abilities, so if the top level is there, some employees will always aim for it.

Unfair systems. People of all ages and even most mammals understand fairness. It’s an innate concept that most mammals respond to. If an incentive system is unfair or perceived to be unfair, it will be rejected by employees. An unfair system might benefit one group over another or be flat out discriminatory.

At one global seed company, all the employees earned a base salary plus commission. Two people were not eligible for this system. They worked in the regulatory and compliance division and earned a flat salary. One colleague worked overseas and was happy with the arrangement. The other worked in the main office with all the employees getting sales bonuses. To her, the system seemed unfair. She covered a global territory, which would have led to a much higher payout if she qualified for the bonus system.

Not framing the new system. Hall’s research shows that new incentive programs can be framed in one of two ways.

•When the framing focuses on the money and everyone should work harder for more money, the programs fail to gain wide-spread company buy-in.

•Conversely, when a CEO says: “We are all trying to win. Here is the definition of winning. When we all win, we all get paid!” Employees work toward the goal laid out by the CEO.

•When the rules and objectives of an incentive program are clearly defined, and the team is encouraged to succeed together they are more likely to be effective.

Designing your own system

Now is the time to start thinking about your own business. Have you ever critically looked at your incentive plans or did you borrow an incentive structure from another business? Hopefully this article highlights how, when used correctly, your incentives can be a tool to attract the right talent to your business and maximize employee productivity.

Here is a quick checklist to help you get started

Figure out what your business goals are.

Think about what will motivate your employees to excel in the workplace.

Consider the incentives you’ve selected, think about what problems they might raise from people striving to obtain your incentives and develop additional metrics to balance out the initial incentives. If you are paying by the piece, then adding quality metrics to ensure that quality does not suffer because of speed.

Review the total package.

Explain the new metrics, goals, and incentives to your employees.

Dr. Hall’s book is not out yet, but when it is, we will let you know! It will include a step-by-step guide to reviewing your own incentive plan and implementing it.

Podcast

Don’t Get Caught on the Wrong Side of EU Privacy Requirements

Jodi Daniels is Founder and CEO of Red Clover Advisors, a privacy consultancy, helping companies create privacy programs, build customer trust and...

Calendar

Do NOT follow this link or you will be banned from the site!