Five Guidelines for Incentives
I often get asked about incentive programs, a favorite topic of mine since many plans assume complex forms in an attempt to achieve multiple objectives.
In analyzing incentive plans, I use five guidelines:
1) Motivation. Make sure an incentive is really an incentive; a PhD shouldn't be a prerequisite to figuring it out. Employees should be able to figure their incentives on their drive back to the office.
2) Evolution. Don't try to build Rome in a day – allow the plan to evolve over time, especially if your employees don't have much experience with incentives.
3) Imperfection. All incentive plans have inherent flaws, so realize they are no substitute for good management. In fact, good management can survive without a good incentive plan, but a good incentive plan cannot survive without good management. I know it seems obvious, but many tend to forget it.
4) Integration. Keep incentives narrow and focused on the behaviors they need to reward, and integrate other compensation and benefits to reward non-sales efforts (i.e., retention is important even though it may not show up on a sales report).
5) Practicality. Make sure incentives are operationally feasible in terms of running the metrics and paying your people. You have to be able to engineer what the architect sketches.
Typically, when incentive programs are rolled out, we look at them as additive rather than subtractive; employees will do the extra things we want to earn the incentive. This is a fantasy. If employees only have so many hours in a day, the extra effort they will devote to earning incentives will come from other activities. For instance, a sales incentive program will likely take time from activities involving retention and credit quality.
This is why a multi-faceted, integrated compensation program is important. Employees need to see that their compensation doesn't revolve solely around the activities supported by incentives. For instance, the use of other forms of compensation can help buttress activities that aren't easily quantifiable. Discretionary bonuses are one such type although some labor attorneys frown on them because they carry greater discriminatory risk.
However, these types of bonuses can help managers retain the authority that incentives sometimes strip away. This stripping occurs because employees are more likely to spend time doing what you reward financially than what you simply command to be done. Consequently, incentives can create built-in resistors to other initiatives that might come up during the year.
For those who have experienced various incentive programs, some of these pitfalls are not new. Still, it's a challenge to make sure they don't get out of hand. The five guidelines above can help.
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