subject: Employee Incentive Programs – The Basics (Part I) [print this page] What is an Employee Incentive Program? A true Incentive Program is a reward system thats designed to motivate employees. A good incentive system can propel even marginal performers to success.
Incentive Programs are widespread in some areas of business. For example, in many industries it is quite common to pay manufacturing staff a bonus based on production levels. Other common Incentive Programs are found in executive management and marketing. While sales commissions do act as an incentive, for the purposes of this discussion, we will consider commission sales to be a form of regular compensation, not part of an employee Incentive Program.
In recent years, an increasing number of small and medium size businesses have turned to Incentive Programs, often with mixed results. Examples of remarkable success are many but so are examples of disastrous outcomes. When problems occur with Incentive Programs, it is usually the result of a poorly planned or managed program, as we shall see later. Why are Incentive Programs Used?
In a small business, employee incentive Programs generally have one or more of these general objectives:
1. Hiring Key Staff in a Competitive Employment Market
The most common of these programs are Signing Bonuses. They are widely used in industries from professional football to the defense industry. These programs are very effective at recruiting but only if your reward is better than your competitions reward. These hiring programs have two drawbacks:
They offer little on-going motivation, and
They provide the rewards up front, before the new employee makes any real contribution.
2. Retaining Key Employees
Retention programs are aimed at retaining senior or key employees. To be effective, the rewards must be attractive enough to overcome the benefits of taking a new position with a new employer.
3. Improving Short-term Performance (most common)
Incentive programs are most effective at improving short-term performance. Even the typical annual company incentive program stretches the length of time during which most employees can be effectively motivated. In addition, for Performance Incentive Programs to be effective, the employees must clearly see a direct connection between their efforts and the established program goals.
Employee incentive Programs are powerful tools but they do have limitations
Effectiveness over Time.
As stated earlier, most Incentive Programs are effective for short time periods. As time passes, the connection between performance and reward becomes less and less clear to most employees.
Incentives vs. Base Pay.
To be effective, incentive Programs must either:
Be perceived as additions to a competitive compensation base or;
Be perceived as very significant where the base compensation is viewed as being marginal.
Negative Consequences.
One of the common, recurring problems of Incentive Programs is that they may create negative consequences. For example, an incentive Program might create an environment where production of shirts increases by 20% but serious flaws in quality increase by 25% due to a push to increase quantity.
In addition, Incentive Programs almost always prove unsuccessful if:
The workforce is unhappy or distrustful;
Management is inadequate;
Communications are poor, and
The Program is poorly designed or implemented.
The Successful Employee Incentive Program.
While Employee Incentive Programs are widely used in large businesses, their effectiveness is open to question. However, in small businesses, there is little doubt that an effective program can be a major factor in short-term profitability and success!
The key is that the program must be effective. If you review the experiences of companies with programs that failed and companies with successful programs, the clear difference is planning!
In almost every case, successful programs were developed following a four phase approach as follows: Phase I Program design Define company goals
Define Program goals Phase II Program development Define Program characteristics
Develop program rules Phase III Program modeling Test program
Revise Program as required Phase IV Program operation Implement Program
Communicate and monitor progress
Part II of Employee Incentive Programs will discuss the four main program categories:
