Enterprise Software

Bad economy stirs interest in incentive compensation, but does it work?

When the economy starts to tank, interest in variable pay (incentive compensation) tends to surge, according to one expert. But the question remains: Do such compensation plans work?

Compensation consultant Ann Bares says one thing she's learned from 20 years of experience consulting with organizations in the areas of compensation and performance management is that interest in variable pay (incentive compensation) tends to surge when the economy goes bad. In this piece for WorkforceWeek, she says:

I see incentives, when well-designed and well-implemented, as a form of partnership between employer and employee. If ever there was a time when all oars needed to be pulling in the same direction, it has to be now - so using incentives as a means of strengthening partnership seems like an idea whose time has more than arrived.

The question that remains and that is hotly debated is whether incentive compensation works. In the 1993 book Punished By Rewards: The Trouble with Gold Stars, Incentive Plans, A's, Praise, and Other Bribes, Alfie Kohn argues against the effectiveness of incentive plans. His main arguments against them are:

  1. Rewards punish those who don't merit them and and punishment destroys motivation.
  2. When employeees vie against each other for rewards, you sacrifice relationships.
  3. The reasons behind results are too complex and sometimes not understood by management in designing rewards programs.
  4. Rewards discourage risk taking. As Kohn says, "People will do precisely what they are asked to do if the reward is significant' enthuses one proponent of pay-for-performance programs. And here we have identified exactly what is wrong with such programs."
  5. Extrinsic motivators reduce intrinsic motivators. In other words, if an employee has begun to model his work around extrinsic rewards, he will lose the ability to motivate himself.

I think that these are valid points, but incentive compensation can be designed around these issues. Unfortunately, the incentive plans are usually designed by exectuives pretty far removed from day-to -day operations. It's easy to see where things could become problematic.

What's your take on "creative incentives"?

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Toni Bowers is Managing Editor of TechRepublic and is the award-winning blogger of the Career Management blog. She has edited newsletters, books, and web sites pertaining to software, IT career, and IT management issues.

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