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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About

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.

39 comments
jdclyde
jdclyde

If someone is paid based upon a certain criteria, all else will be forgotten by that employee, and this hurts the company in the long run. There are ways to make just about any report look good if you cut enough other corners.

cerian
cerian

I think that employers and employees should work together and fairness of pay cuts both ways. There really needs to be more flexibility in the system for employees to have a life outside work but equally employers need to be able to manage income fluctuations without getting companies into debt. Maybe a flexible pay scheme would help - we all need a more stable economy. But rewards based payments must be the epitome of everything that is currently wrong with the system. Good quality work is much pleasure as service. Thanks

afrodsham
afrodsham

if you have to offer bribes to your employees to get performance, then the company culture is sick imho.

Jalapeno Bob
Jalapeno Bob

Workplace incentives usually assume that all employees are motivated by the same incentives - usually money. This is not reality. Many of the top performers are not primarily motivated by money before the incentive program. After the program has been in place for a while and the money grabbers are scheming to win the money, the true top performers have lost their motivation and, in many case, moved on to other companies. Net result, performance increases in the short term, but declines in the long term, often irrevocably. The money grabbers quickly exhaust their ideas and, when the ideas stop, the incentive raises stop. This makes the workforce overpaid, disenchanted and difficult to manage. Many will want to leave, but find themselves having to take a cut in pay to do so and, as a result, stay. They feel trapped. Management can expect only a minimum amount of work from them. In summary, incentives cannot be all about money. Any incentive program must target the current top performers and keep them motivated. This is not easy. While I may be motivated by a special educational opportunity, Harry may be more motivated by a plaque on his wall, Bill with the ability to work from home and Sally with the ability to avoid rush hour traffic by arriving at 6AM and leaving by 3PM. Each employee, especially each technical or skilled employee, is unique, and so are their motivators. Unfortunately, upper management seldom understands this. Many of them are motivated by greed - be it for money, status or power. These people can never understand people who are not motivated by greed. As a result, the incentive program is misguided and, in the long run, will fail and will leave the organization in worse shape than when they started.

Gabby22
Gabby22

I agree with the downside of incentives and can add one more, probably the most important: If the incentives don't *exactly* map to the company's health, you're in deep trouble. And it's very difficult to ensure that the mapping is correct. There are many good examples of this, from CEOs who met every one of their incentives but consequently drove the company into the ground, to insurance companies whose only priority was sales, encouraging shonky salesmen. The sub-prime crisis is another example. I believe in performance assessment/measurement though, but not tracked directly into incentives or bonuses. If it's done well, and it often isn't, it gives a great opportunity for discussion between workers and supervisors.

TonytheTiger
TonytheTiger

simply replace employees until it does :)

matt.riesz
matt.riesz

Here's an example about how "incentive rewards" work in real life. I was a salaried employee, with 100% of my compensation coming from salaries. Company decided that the "new, incentivized" plan would now give me 80% of my former salary, and up to 20% in variable compensation based on my team's performance toward quota, with a possible uplift if we achieved over 100%. Sounds great on paper. But then they made sure the quotas were set high enough that nobody could achieve them. Net result -- saved them money by giving me and those like me a 10% pay cut (yeah, we made half of the variable by achieving 80% of our quots, which amounted to more than 130% of the previous year's performance). Even dollar incentives SUCK.

julien.dionne
julien.dionne

Toni, Great post and I have a few comments. First regarding your statement "interest in variable pay (incentive compensation) tends to surge when the economy goes bad."; that is also what I would expect, however most survey results show that a large proportion of companies have reduced or are planning to reduce their incentive compensation budget for 2009, as well as reducing the number of people receiving incentive compensation. I talked about this phenomenon in my post Incentive Compensation and Total Reward Strategies During a Recession on my Sales Performance and Incentive Compensation Management blog LeapComp.com Secondly, Alfie Kohn's book is pretty dated by now and most sales management teams believe that incentives help bring focus to the efforts of a dispersed workforce. After all, if incentive compensation was not effective, why would most of the world's largest and most successful company use such a strategy? Finally, Incentive compensation can be effective when compensation plans are well designed and aligned to corporate objectives, and when the underlying technology and software solutions are well implemented (something that didn't exist commercially when Kohn wrote his book). So I agree with you that "incentive compensation can be designed around these issues", but I would add that it also needs to be implemented around these issues as well... Julien http://leapcomp.com

wbranch
wbranch

Haven't we learned anything from executive compesation plans? Incentivized pay only encourages people to act in their own best interests, not the company's. If you pay me to produce X lines of code, then I'll simply code less efficiently to make the goal (how would management know the difference)? If you pay me to complete X number of projects, I'll just make up projects that are easy to meet the goal, regardless of whether they are beneficial to the company. If you pay me based on company performance, I don't have direct control over that, so it's arbitrary and unfair. I think many companies would benefit from putting their resources behind finding quality people, paying them fair wages, and if you want to have bonuses on top of that, that's fine. You'll probably spend just as much time trying to design around loopholes in your incentive plan, which will end up leading to new loopholes anyway.

MikeZane
MikeZane

I work to pay the bills. Those stupid rewards do not help my bottom line and just tick me off. I have actually asked my boss for the cash value of those things. They are so worthless, more so in a tanking economy where every penny counts. It is just more clutter (certificates or calendars) or time off against your billable percent (company 'trips'). I need $$ not calendars.

fletcher.khoo
fletcher.khoo

1. Make rewards achievable with different tiers of incentives 2. Make rewards tie to personal performance as well as corporate/team performance. 3. The rewards program should be consulted with line managers and supervisors

boxfiddler
boxfiddler

You've fallen hard for that whole 'fairness' line of crap, haven't you?

Tony Hopkinson
Tony Hopkinson

You have a lot to learn. :p Any company pay scheme is designed to pay less for more. It's business 101. We are a cost. They might tell us we are an asset, but assets cost money to buy and maintain. so it's just corporate BS. You'll find that out the day you go into the office, to find out how valuable an asset your are. You need to get a bit more clued up mate, otherwise they will take you to the cleaners, its their job.

hoewah.leong
hoewah.leong

for good motivated people, incentives are tokens of appreciation for a job well done. for avg. or lazy employees, it's a bribe to get them to do the work they're supposed to do in the first place. again, i am all for culling the weak. and maintain the strong. Jack Welch style. sounds cruel. but you don't want dead woods dragging the rest down.

Tony Hopkinson
Tony Hopkinson

is more challenging tasks. Not so much promotion, as in given good performance being trusted with more critical, or difficult projects. I've been on lots of incentives schemes, every one was an excuse for paying me less, not more. That's why they are popular in a downturn

hoewah.leong
hoewah.leong

hi Jalapeno. i agree with you on: "...top performers are not primarily motivated by money before the incentive program." Training (relevant ones not the send-you-to some-free-seminar type) that adds market value to the employee is one. Recognition being another. How about buy them an 'best-employee' ad space in a well known tech magazine? The best thing is just to Ask the top achiever what they really want. and give them that. Yep. reward the wrong people and you're stuck with dead woods while the good people leaves.

MikeZane
MikeZane

Spoken like a front line guy who KNOWS WHAT IT'S LIKE. Incentives = crap

Tony Hopkinson
Tony Hopkinson

Disguised paycut when they've got you by the nuts.....

afrodsham
afrodsham

one of the funniest awards I witnessed in a support team was the "lean on me" award. Dumbest thing I'd ever seen. The solitary level 2 support guy won it... Think about it! Cost/quality/time. Simple principle. To me it is easy to see the effect of incentives on this classic relationship.

TonytheTiger
TonytheTiger

[i]I think many companies would benefit from putting their resources behind finding quality people[/i] Are the managers of the above company the same ones referred to in: [i]If you pay me to produce X lines of code, then I'll simply code less efficiently to make the goal (how would management know the difference)?[/i] ? If so, I can see a potential problem :)

boxfiddler
boxfiddler

Often in force in rural factories, employees are paid by the 'piece'. The mindless (who can tolerate the numbing sameness) and graceful (with their hands, that is) make out like fat rats. Others however, find themselves constantly broke.

julien.dionne
julien.dionne

Incentive compensation is not only about recognizing employees and giving them non-cash rewards. While this has something to do with motivating employees, incentive compensation is about compensate employees for superior performance... real cash for hard work. http://leapcomp.com

RNR1995
RNR1995

Everybody does something for a living, most people are paid X amount of dollars per an hour, or you may be management that is salary. Somewhere in your company is the way you are evaluated as an employee, so somewhere in that evaluation is a way to make incentives for cash, it cannot get any simpler. Every job has a way to be evaluated and measured. Yes plaques on the wall for employee of the month may be nice, but we all know where the buck stops..... And we have all worked with the slacker, and as nice a person as they may be, they are bad for the company, and should be cut out like a cancer. So if incentive plans are correctly implemented they can be great for all, if not they can be a complete disaster. So maybe the incentive should be your raise at the end of the year, performance based percentages. Under performers lose money and over performers get money....

tomslick42
tomslick42

I think incentives are a great idea, and work towards the results-based pay that everyone should get. They key is to measure the results in terms of value that is not always money. The example that comes to mind is Firefighters. They provide great value, and the results of their efforts are lives and property saved - what do you use to measure that? The other point is that if you provide only a small set of incentives (the best salesman gets the trip to Jamaica) then everyone else LOOSES, and that needs to be avoided. That's where relationships suffer with competition. The incentives need to be geared towards LONG TERM results, and not SHORT TERM results as is usually the case. A good example here would be to pay teachers a bonus based on the number of students that pass and graduate - and pay them only WHEN the students pass and graduate.

Tony Hopkinson
Tony Hopkinson

program should be discussed with the workforce, otherwise it's simply a disguised pay cut. Incentivising is never about rewarding those who do contribute, but about penalising those who don't. Essentially correct, but every scheme I've ever seen that started out paying people for how they contribute that increased the wage bill for the 'shop floor' (despite any gains in profit) was quickly amended. The manager who did it was rewarded for reducing costs.....

Tony Hopkinson
Tony Hopkinson

The other two options are that he's a management shill. Or we need the boys in white coats to put him in a long sleeved jacket, on the way to his new rubber room.

santeewelding
santeewelding

(sees no one else occupying the chair) Gee. I did not know that.

doaks
doaks

The concept of rewarding employees based on performance is sound, but there are many possible failure points. There are a number of keys to making an incentive plan work: 1. Offer a reward that is actually an incentive ? meaning sufficiently desirable to motivate. 2. The incentive program metrics and goals must align with the strategic plan of the organization. 3. The program should have a ?C? level sponsor, with high-level buy-in from every dept. involved. 4. The incentive has to be attainable and fair. (Critical for ?buy-in.) 5. The means of earning the incentive has to be clearly documented and communicated at all levels. 6. You shouldn?t need a PhD to understand the program, or even an MBA. 7. Credible, accurate and auditable data sources must be available to support the calculations. 8. The incentive should reward performance that exceeds expectations and not be punitive. 9. Feedback, usually in the form of one or more reports, to the participant must be clear and easily deciphered. 10. A consistent and transparent method for handling discrepancies and disputes should be established. 11. Integration and alignment with Business Processes must be carefully executed. 12. Exceptions to the rules should be rare. From an IT perspective, selection of the best solution for the company is critical, and the support team is another crucial component to a successful implementation and launch that can?t be emphasized enough. I work for one of these solution vendors, one that has been around since 1983. In my eleven years with the company, I have seen many successful programs put in place that exceeded people?s wildest dreams, pumping up revenue, retaining the best employees and improving the overall corporate culture in surprising ways. Sadly, I have also witnessed implementations that crashed and burned because one or more of these fairly obvious keys was ignored.

TonytheTiger
TonytheTiger

it just wasn't your cup of tea. [i]The mindless (who can tolerate the numbing sameness) and graceful (with their hands, that is) make out like fat rats.[/i] Doesn't everybody try to use their talent to their advantage?

MikeZane
MikeZane

Forgive my hostility, but this is a very bitter subject to me. Please understand that I am not looking at this from the perspective of someone who hands them out, but from the perspective of someone who gets them. And I can smile and fake a happy dance just as well as any actor. But you know what, I am still ticked off. I don't want to have to fight with my teammates to pay the bills. I don't want your crappy award points or certificates. I want to be paid so I can take care of my needs. Superior performance is a matter of opinion, and the 'popular kids' get the rewards. It is always the same group, while the rest get left out. It doesn't work. Try putting on your peasant's garb and walking with the grunts once in a while. You will never really know how we feel unless you are one of us. Oh, and yeah, I do get plenty of rewards, my desk is covered with them. But they don't motivate me. I look at them and think, I'd rather have had the cash.

bob.cooper
bob.cooper

Schools are actually a giant assembly line. Metrics are dropout rates and student performance. Incentive pay would be IDEAL for teaching. Schools already have the performance history of their students. They should be able to project student outcomes from this. Incentive pay would be based on how much students exceed these projections. Bad teachers would receive less and would have a great incentive to improve or try something else call center tech support. A few years ago I was a laid-off telecom engineer. I took a call center tech support job. Salary, schedule, and promotions were entirely based upon performance. The company had a well defined evaluation matrix based upon attendance, call documentation, and call monitoring. Overall incentive pay averaged about 9%. We supported several accounts. Some accounts tried to motivate us with non cash incentives. I avoided those accounts. I found them to be demeaning (like being on a game show) and what do you do with a bunch of stuff you don?t really want? One account asked us to reduce call time. When they added call duration to the evaluation matrix my call time went from 12 minutes to 3.6 minutes within 2 months. I did this by eliminating unnecessary conversation and by reordering procedure steps. Customer satisfaction improved because support calls were resolved quickly, usually without a lot of probing questions about settings. I now work for a company which bases annual bonuses on corporate ?goals?. This has NO performance incentive. I view it as another ?Christmas bonus?.

Tony Hopkinson
Tony Hopkinson

That means they get paid if they give students a pass, not that they should... Don't set up incentives that allow people to profit from doing their job poorly.

hoewah.leong
hoewah.leong

hi Nice list of theories. but can you give a concrete example of how's it's being implemented by the company you've referred to?

Tony Hopkinson
Tony Hopkinson

taking them into account would have defeated the ojbective , of reducing salary costs.

boxfiddler
boxfiddler

or believe me, they wouldn't be teaching. Even the best teacher is wasted on bad students. As long as parents are more concerned over what they drive and wear, the size of their house, and the quantity of their possessions than they are the health of their children's minds, teachers are hang-tied and wasting their breath. Doesn't matter what you pay them if their students don't care about learning. Doesn't matter whether they're good or not if their students don't care about learning.

Tony Hopkinson
Tony Hopkinson

No child left behind, to any one with a brain, would mean every child gets a chance to pass. Unfortunately that's really hard to measure, so you get the stoopid cop out of every child gets a pass. Which of course means they all get left behind.

uberg33k50
uberg33k50

And we have the proof in the US with our George W plan of "No Child Left Behind" -- it isn't exactly an incentive pay plan but the schools had to pass certain numbers of students to get the funds they needed. So we get a bunch of uneducated high school graduates that aren't really qualified to work at the local fast food place much less in any other business that requires thinking. Anyone who really thinks this is a good idea is probably a product of the no child left behaind rubish!

Tony Hopkinson
Tony Hopkinson

Incentive pay isn't necessary for good anything. It is necessary when the pay is crap to get those few who are good to do good. Besides the guy said based on exam results of students. That's already incentivised in the UK. End up with a bunch of clueless numpties parroting expected answers, so they pass a test, and the school keeps being funded. The performance targets they have to hit are set by the government, who have a program to use these incentives to increase the number of people passing. Are you seeing the problem here? If not go to one of these schools give them a basic literacy and numeracy test. I could have out performed 90% of them when I was eleven. That was when teaching was a respected and valued profession with a good salary relative to industry and the people who did it were in the main professionals, not struggling general and media studies graduates.