Human Resources

12 Rules For Effective Employee Incentives

June 29, 2010
KEYWORDS employee , incentives
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Behavior followed by a positive consequence--that's the basic premise of employee incentives, says Christie Summerville, human resources consultant for Koker Goodwin & Associates, Wichita, Kan.

Done incorrectly, however, incentives can have unintended consequences and unsatisfactory results. Rewarding loan officers for loan volume, for example, without considering loan quality can be disastrous. And not adhering to the plan demotivates employees.

"The quickest way to destroy motivation in an incentive plan is to not pay what is earned or to pay what is not earned," Summerville says.

To prevent such complications, she advises following these 12 rules for employee incentives:

  • Incentive plans should make a net positive contribution. Some plans are designed simply to give employees more money. Others are developed to ensure that everyone has an opportunity to earn an incentive, even if it's just for doing their job. Incentive plans, individual or group, should add value.
  • Don't incent for what would have been achieved anyway. The objective is to achieve better results than in the past, or better than peer groups.
  • Determine the plan's value. Determine the value of the results and how much to pay employees. Sometimes this must be valued in the long term as an investment. Consider the mix of base and incentive pay when developing individual plans.
  • Establish verifiable goals. Consistently subjective and optimistic determinations in favor of payout can result in the plan becoming an entitlement. Consistent pessimistic determinations, however, can result in mistrust and an attitude that the payout can't be earned so it's useless to try.
  • Keep it simple. Too many objectives are difficult to communicate and measure. Employees can't focus on too many goals at the same time. Complexity causes participants to become passive, not aggressive toward accomplishments.
  • Track results and provide feedback. Do this at least quarterly. Publish results where employees are likely to see them, such as the break room, call center, or intranet.
  • Make goals achievable. If objectives aren't attainable, people won't try. But don't make them too easy, or employees won't make an extra effort.
  • Make incentives large enough. If incentive amounts are too small, they won't motivate employees. Some suggest making the incentive opportunity at least 10% to 15% of base salary to provide sufficient motivation. The larger the salary, the higher the percentage of salary needed to be motivational.
  • Employees prefer frequent payouts. Annual payouts won't cut it. Keeping employees interested requires frequent communication and rewards.
  • Provide leadership. Someone has to build involvement and commitment to achieve the goals. To be successful, an incentive plan must have leaders who coach and encourage employees.
  • Don't pay if the goal isn't achieved. Doing so turns the plan into an entitlement. It's ok, however, to adjust the plan to account for extenuating circumstances, such as an unexpected equipment expense that affects profitability.
  • Ditch a plan that doesn't work. When an incentive plan becomes an expense, it hasn't achieved its purpose. Make sure policies state it's ok to modify the plan to meet business objectives.

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Drew Hawkins
August 26, 2010 12:56 pm
These are a good list of goals. The biggest one is making the goals realistic and communicating well the goals of the incentive plan. In regards to a payout, it's good not to restrict only to a cash-basis. Using a noncash reward or even merchandise can enhance the perceived trophy value of the award for relatively the same cost. Too often cash gets confused in the mind for normal compensation, therefore the award aspect diminishes


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Great article! Unfortunately, most employees don’t feel valued or appreciated by their supervisors or employers. In fact, research has shown that the predominant reason team members quit their jobs is because they don’t feel valued. This is in spite of the fact that employee recognition programs have proliferated in the workplace – over 90% of all organizations in the U.S. has some form of employee recognition activities in place. But most employee recognition programs are viewed with skepticism and cynicism – because they aren’t viewed as being genuine in their communication of appreciation. Getting the “employee of the month” award, receiving a certificate of recognition, or a “Way to go, team!” email just don’t get the job done. How do you communicate authentic appreciation? We have found people have different ways that they want to be shown appreciation, and if you don’t communicate in the language of appreciation important to them, you essentially “miss the mark”. Additionally, employees need to receive recognition more than once a year at their performance review. Otherwise, they view the praise as “going through the motions”. A third component of authentic appreciation is that the communication has to be about them personally – not the department, not their group, but something they did. Finally, they have to believe that you mean what you say. How you treat them has to match the words you use. If you are not sure how your team members want to be shown appreciation, the Motivating By Appreciation Inventory (www.appreciationatwork.com/assess) will identify the language of appreciation and specific actions preferred by each employee. You then can create a group profile for your team, so everyone knows how to encourage one another. Remember, employees want to know that they are valued for what they contribute to the success of the organization. And communicating authentic appreciation in the ways they desire it can make the difference between keeping your quality team members or having a negative work environment that everyone wants to leave. Paul White, Ph.D., is the co-author of The 5 Languages of Appreciation in the Workplace with Dr. Gary Chapman.

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