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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