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.

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

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