Designing effective incentive programs

70% of employees feel that their firm’s incentive plans are ineffective. We turn here to why such plans fail, and to how to improve their effectiveness.

Why incentives Plans fail?

Experts have proposed many explanations for why incentive plans fail. We can summarize their reasoning with the following points:

Performance pay can’t replace good management. Performance pay is supposed to motivate workers but lack of motivation is not always the culprit. Ambiguous instructions, lack of clear goals inadequate employee selection and training, unavailability of tools and a hostile workforce (or management) are some other factors that impede performance.

You get what you pay for: An incentive plan that rewards a group based on how many pieces they produce may lead to rushed production and lower quality. A plant wide incentive for reducing accidents may simply reduce the number of reported accidents.

Pay is not a motivator: Recall that psychologist Frederick Herzberg says employers should provide adequate financial rewards and then build other more effective motivators (like opportunities for achievement) into jobs. More challenging jobs and employee regulation often make more sense than do financial incentive jobs

Rewards punish: Many view punishment and reward as two sides of the same coin. Herzberg says do this and you’ll get that is not very different from Do this or you won’t get that.

Rewards rupture relationships: Incentive plans have the potential for encouraging individuals (or individual groups) to pursue self interest at the expanse of teamwork.

Rewards can have unintended consequences: People tend to put their efforts where they think they’re being measured. So, for instance reward only productivity and you end up with poor quality.

Rewards may undermine responsiveness: When employees’ main focus is on achieving some specific goal like cutting costs, any changes or distraction make achieving that goal harder for the employees. Requests from management for assistance in implementing a needed change (for instance in factory designs) may therefore trigger resistance.

Rewards undermine intrinsic motivation: Edward Deci said contingent financial rewards (incentives) may actually undermine the intrinsic motivation that often results in optimal performance. The argument is that financial incentives undermine the feeling that the person is doing a good job voluntarily.

How to implement effective incentive plans

What can the manager do to make an incentive plan more effective? Some guidelines follow:

Ask: Are performance levels inadequate due to motivation? It makes sense to use an incentive plan when motivation (and not ability) is the problem and where: there is a clear relationship between employees effort and quantity or quality of output the job is standardized the work flow is regular; delays are few or consistent and quality is less important than quantity or, if quality is important employees easily measure and control it.

Link the incentive with your strategy; decide how the incentive plan will contribute to implementing the firm’s strategy and objectives. The key thing is that in the best of all possible worlds, each item on your awards menu earns its keep by delivering o its promise whether to inspire higher performance reduce costs or any of a range of results that fit your business and its strategic plan. For example, one incentive program at Sun Microsystems supports the firm’s customer satisfaction strategy. Employees receive incentive based on achieving improvements activities like on time delivery and consumer returns about 43% of employers surveyed by consultants. Watson Wyatt Worldwide recently said they were linking their rewards to business strategy up from 35% in 1996.

Make sure the program is motivational: Ideally the incentive plan should reward employees in direct proportion to increased productivity or quality. Employees must also perceive that they can actually do the tasks required. The standard has to be attainable and employees should have the necessary tools, equipment and training. Victor Vroom would say there should be a clear link between effort and performance and between performance and reward and that the reward must be attractive to the employee.

Make the plan easy for employees to understand: Employees should be able to calculate their rewards for various levels of effort.

Set affective standards: make standards high but reasonable – there should be about a 60 to 70% chance of success. And the goal should be specific – this is much more effective than telling someone to do you best.

View the standard the standard as a contract with employees: Once the plan is working use caution before decreasing the size of the incentives. Rate cuts have long been the nemesis of incentive plans.

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