What Incentives Can Do, What Incentives Cannot Do

Incentive compensation. Powerful stuff when used well and unfortunately potentially even more powerful when misused and misdirected. Chip and Dan Heath said it well...

Incentives are dangerous, and not just because people game them. They often yield collateral damage. Remember the tale of the Darwin Award winner who strapped a jet engine to his car, dreaming of a joyride for the ages, and then met his sorry end as a human flapjack on the side of a mountain? Incentives are like that jet engine. There’s no question the engine will take you somewhere, fast, but it’s not always clear where. Or what you’re going to mow down on the way. Yet incentives are still the first resort of most managers, perhaps because they all think they’re smart enough to create the perfect carrot.

How do you know when an incentive plan is a good idea and when it is not? 

For starters, it is important to have a sense of the circumstances you are fixing to drop them into and the objectives you (or the prospective plan "sponsor") hope to achieve by putting them in place.  If you don't, start there.

Next, you'll need to face up to the reality that there are problems which incentives cannot fix (and may even make worse).  What follows is my own list of what incentives can and cannot do.  Many of you will have your own lists;

Things Incentives Can Do

1.  Incentives can focus out top priorities for employee attention. This is one of the most potent capabilities of incentives

2.  It can communicate to employees that where their efforts can create the most value.

3.  It shares the rewards of success. 

4.  It could encourage teamwork and collaboration across business or functional lines.

5.  Incentives can help drive and reward the development of critical skills and capabilities.

Things Incentives Cannot Do

1.  Incentives can't fix broken organizational structures and processes. If the structure and processes are so bad that have to dangle money to "motivate" people to work around them.

2.  It can't fix bad job design and staffing decisions.  Incentives are not an alternative to designing and staffing work roles in ways that make good performance possible and even likely.

3.  It can't serve as a substitute for enforcing policies and job requirements.  Following policy and meeting job requirements should be considered a condition of employment, not something you "purchase" with extra compensation in order to avoid confronting those morale-depleting slackers.

4.  Incentives cannot manage your employees for you (honestly, this doesn't even work with most sales jobs) and they are not an alternative to setting and communicating clear performance expectations.

Melcrum (2007) also cites the importance of compensation, benefits and formal recognition in instilling employee engagement. In 2008, a survey by CHA asked one thousand employees what single action their employer could take immediately to help improve engagement during the economic downturn (CHA, 2008 cited in Peacock, 2008). First and foremost, a pay rise including bonus or incentives was requested, followed by company organized other incentives and reassurance about job security.

References

Melcurm (2007), The Practitioner’s Guide to: essential techniques for employee engagement, Melcrum Publishing Limited.