What Incentive Compensation Can (and Can’t) Do For Your Workforce

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Jan 27, 2014

Incentive compensation. Powerful stuff when used well and — unfortunately — potentially even more powerful when misused and misdirected.

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.

Readers, I suspect, will have their own lists as well — which I would encourage them to share here too.

Things incentives can do

  1. Incentives can focus. Incentives call out top priorities for employee attention. This is one of the most potent capabilities of incentives (assuming you are clear on the implications and consequences of that “focused” attention).
  2. Incentives can guide. Incentives are communication tools, pointing employees to where their efforts can create the most value.
  3. Incentives can share the rewards of success. Incentives provide a mechanism through which employees can share in the economic success they help create.
  4. Incentives can weaken silos. By tying groups together with shared performance metrics and reward opportunities, incentives can encourage teamwork and collaboration across business or functional lines.
  5. Incentives can promote development. 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 your structure and processes are so bad that you have to dangle money to “motivate” people to work around them, you’d be well advised to bring resources to bear on the real problem (which is not a lack of rewards). Barring that, better have a really clear idea about the type of workarounds people are likely to attempt in pursuit of that extra cash.
  2. Incentives 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. Incentives 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 can’t get you off the hook for providing regular feedback to employees and correcting work efforts that are off the mark. And THAT is because…
  5. 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. Although there will seemingly ALWAYS be managers who want to give this a shot.

What can you add to these lists?

This was originally published at the Compensation Café blog, where you can find a daily dose of caffeinated conversation on everything compensation.