Designing and executing effective incentive programs

Roughly 70% of employees feel that their firms’ incentive plans are in effective. We turn, here to why such plans fail, and how to improve their effectiveness.

Why Incentive 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 motivations not always the culprit. Ambiguous instructions, lack of clear goals, adequate employee selection and training, unavailability of tools, and 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: Employers should provide adequate financial rewards and then build other more effective motivators like opportunities for achievements and psychological success into jobs. More challenging jobs and employee regulations often make more sense than do financial incentive plans.

Rewards punish: Many view punishment and reward as two sides of the same coin. They say ‘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 financial rewards for themselves.

Rewards can have unintended consequences: All people know that their income will depend on their productivity or performance rating, and they will focus on the numbers. Sometimes they will manipulate the schedule for completing tasks or even engage in patently unethical and illegal behavior.

Rewards may undermine responsiveness: When employees’ main focus is on achieving some specific goal like cutting costs, any changes or distractions make achieving against change and responsiveness.

Rewards undermine intrinsic motivations: 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.

Sometimes incentive pay doesn’t make sense. For example: when employees are unable to control quantity of output such as on machine-paced assembly lines. In general, it makes more sense to use an incentive plan when there is a clear relationship between employee 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 can 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 awards menu earns its keep by delivering on its promise, whether to inspire higher performance, reduce costs or any of a range of results that fit your business and its strategic plan.

Make sure effort and rewards are directly related. The incentive plan should reward employees in direct proportion to increased productivity or quality. Employees must also perceive that they actually do the tasks required. The standard has to be attainable, and you have to provide the necessary tools, equipment and training.

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

Set effective 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 your best”.

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

Get employees’ support for the plan: Restrictions by members of the work group can undermine the plan.

Use good measurement systems; In the case of merit pay, for instances, the process used to appraise performance must be clear and fair if the plan is to be of any use.

Emphasize long term as well as short term success. For example, just paying assembly workers for quantity produced may be short sighted: Longer term improvements like those deriving from work-improvement suggestions are often equally important in increasing the firm’s value.

Adopt a comprehensive, commitment-oriented approach: From the employees’ point of view, incentive plans don’t exist in isolation. For example, trying to motivate employees with a new incentive plan when they don’t the skills to do the job, or are demoralized by unfair supervisors, a boring job, or a lack of respect, might well fail. Therefore, it’s best to install the program within a framework of HR related practices that promote employee commitment by making the company a place in which employees want to work and do feel like partners.

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  • kamakshipanda


    it was really nice. can you be some more detail on different types of performance modules implemented particular process or system following.

    plz throw some light on talent management.



    wi9sh you all a lovable valentines week.

  • Rupali

    Good piece of information.