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Incentive compensation should communicate an organization's objectives directly to employees, so why do so many plans fall short of success? In presentations at the 2012 WorldatWork Total Rewards Conference, held in Orlando May 21-23, 2012, compensation specialists shared lessons on the effective use of incentive pay programs and warned of errors to avoid.
"First, determine the business strategy and objectives that incentives are intended to drive," advised Jason Adwin, senior consultant at Sibson Consulting. "The role of incentives is to motivate and engage employees in order to drive intended business results and reward and differentiate employees fairly for the value they create," he noted. "Some employees are going to give above and beyond, with or without incentives. But the program, by sharing their success stories and modeling their behavior, motivates the others."
"Know what you provide vs. the market and use it to your advantage" for recruiting talent and ensuring engagement among employees, recommended Elyse Lyons, senior consultant at Sibson Consulting, who co-presented with Adwin.
According to Lyons, incentives don't work when they become an entitlement, leaving employees disappointed if incentive levels decrease from one year to the next.
Another pitfall: confusing metrics with no clear line of sight, requiring multiple Excel spreadsheets to explain and track. "Employees should be able to figure out the incentive plan on a paper napkin," Lyons argued.
Also, beware of plans that demotivate high performers through insufficient differentiation and of misaligned efforts that result when teams have conflicting incentives. "One sign of misalignment is when C-suite executives earn incentives and middle management doesn't," Adwin noted, adding, "When individual, department and organizational incentives align, employees can see how their actions help the organization to succeed."
Another common mistake, Adwin pointed out, is requiring effort beyond every day job responsibilities to earn incentive pay. Instead, incentives should reward excellent performance in an employee's normal job duties if that performance is an outsized contribution to the organization's success.
Bonus amounts that don't seem large can change behavior for the better, Lyons noted. She related how when the former Continental Airlines wanted to improve its poor on-time record, the airline began offering a flat bonus of $65 a month to members of crews with the on-time departures. As a result, pilots were helping flight attendants clean up plane cabins to ensure timely takeoffs.
"Train your managers to explain that, when incentives are not earned, ‘the performance of our business would not allow us to give the incentive you wanted,’" said Adwin. "Don't say, ‘I wanted to give you a bonus but HR wouldn't let me.’"
Types of Incentive Plans
Best Fit When…
Employees can see their impact on profitability, such as in an operations environment (e.g., a call center).
Units are more stand-alone than integrated. Environment is stable at the group level.
Groups consist of individual contributors. Required results are clear and relatively stable.
Spot cash awards
Make or break projects are well defined. Awards are administered with utmost fairness.
Source: Sibson Consulting.
Learning from the Sales Force
"Imaginative incentives really do change behavior," said Alan Gibbons, managing director of The Reward Practice, a pay consultancy, during another conference presentation. He urged HR to learn from the sales force how to motivate the rest of the organization. "Sales incentives are good at setting clear links between what you do and what you get," he noted. However, beware that sales incentives might be less effective at recognizing effort as well as achievement, which is also important, he noted.
"When you have excellent people in dispensable roles, you have to push them up to necessary, core and mission-critical jobs," Gibbons advised. "High-performing individuals in mission-critical jobs will ensure that the organization's strategic objectives are met. Accordingly, the organization should endeavor to direct the highest pay opportunities—particularly incentives—toward these individuals and away from those who are in jobs of less strategic importance [and] who are performing at lower levels. Put the money where it will make the most difference."
During the same session, Carrie Ward, director of consulting services at SalesGlobe, suggested informing employees' spouses about incentive pay programs so they can encourage their spouses to strive for those higher rewards. "Send incentive program information to home addresses," she recommended.
That view was echoed in another session by Ania Krasniewska Shahidi, senior director at the Corporate Executive Board. "Spouses are the most influential source for delivering benefits information to drive behavior change," Shahidi noted, adding that "sending communications to the employee's home and making online portals accessible to spouses can enhance message impact."
Other sessions provided further advice on compensation communications. "Employees won't believe there is a link between pay and performance unless they can see it," said Margaret O'Hanlon, founder and principal of re:Think Consulting. Unfortunately, "the legal department often warns, ‘Don’t promise anything; keep it vague’" to avoid liability issues, she noted. However, "it's very difficult to communicate vagueness."
Sometimes incentives are intentionally designed to be opaque "so employees won't realize how limited the program is," added Dan Walter, president and CEO of pay consultancy Performensation. "That's a terrible idea," he stressed. "People aren't stupid."
"Focus on communications from the beginning, and plan to make communications part of your everyday work," advised Ann Bares, managing partner at Altura Consulting Group LLC. She pointed to a video interview in which Tracy Kofski, vice president for compensation and benefits at General Mills, encouraged HR to "Start early on communications … What we've learned is if we get all of our design ready and we wait until the end to write our communications, we often realize that we would have designed some things differently."
"Get your managers to a place where they can pull off conversations that effectively connect pay and performance with business results," Bares recommended. Use employee focus groups to see how well the message is getting across, remembering that "communication is a two-way street."
She elaborated how at one company management was designing communications for the rewards program based on an assumption that the staff needed prodding to increase productivity. Focus groups, however, revealed that employees wanted to be more productive put felt management was putting obstacles in their way. Communications based on management's misperceptions would have been seen by workers as belittling them rather than providing motivation, while hearing from workers alerted management to problems that needed fixing.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Reward Strategies Should Target Key Talent, SHRM Online Compensation Discipline, May 2012
Integrating Performance Management and Rewards at Microsoft, SHRM Online Compensation Discipline, May 2012
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