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Incentive Plan Design Begins With Good Questions

October 14, 2008
Related Topics: Variable Pay, Compensation Design and Communication, Featured Article, Benefits
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Incentives continue to surge in popularity as a management tool. A recent WorldatWork survey found that 81 percent of U.S. organizations (up from 68 percent just six years ago) are using variable pay—or incentives—for employees outside the sales force. So popular, in fact, is this particular pay-for-performance approach that leaders are increasingly calling for it as a solution to all manner of performance issues. This puts us as human resources professionals on the spot to deliver on the demand. I would urge caution, though, before leaping at that urgent request for an incentive plan. Take a deep breath and take some time to fully understand the nature and context of the performance issue at hand. If there’s one thing I’ve learned in many years of designing, implementing, reviewing and—yes—fixing incentive plans, it’s this: Incentives can be a powerful force for the positive, but they also have the potential to be ineffective and even damaging when carelessly thrown at ill-defined problems.

The temptation to do just that, however, is strong. I recall a conversation with the CEO of a manufacturer who felt his company urgently needed an incentive plan so that employees would "perform better." "Do they have pretty clear information on performance expectations?" I asked. "Are they getting good feedback on how they were doing?" Negative. The CEO informed me that they didn’t do performance management, didn’t even have job descriptions in place. These things, he told me, were simply not their "style."

Further conversations with other members of company leadership revealed that many people, including those in management roles, had no clear idea on what was expected of them. The CEO was holding out hope that an incentive plan would provide a shortcut of sorts, allowing the company to detour around all those messy and time-consuming management and communication tasks, and get right to the place where employees performed exactly as desired. Unfortunately, as most of us know, that isn’t how people management works. And dropping an incentive plan into this situation, holding out a reward for better performance without having a foundation of performance measurement or even basic information on job accountabilities in place, would have been a waste of time and money, at best.

Then there was the health care center whose board asked for incentives in order to push patient-care providers to be more productive. It didn’t take a lot of investigation for me to learn that 90 percent of the productivity of the providers was out of their hands, and in the hands of the scheduling department, which had a long history of thwarting all provider efforts to more fully utilize their available time. The first priority of the scheduling department, you see, was to ensure that all patients were given their top-choice time slot, not to ensure that provider schedules were full.

In this scenario, it would have done no good and would have created a great deal of frustration to dangle incentives in front of the providers without first addressing the larger system in which they had to function—particularly the obstacles created by the scheduling department.

In another instance, a retail company executive wanted to use incentives to drive significant changes in the way the company’s sales staff served customers. When asked to detail the most common characteristics of sales employees, she described them as people who "love the product and are totally unmotivated by money." So we were going to ask them to drastically change the way they dealt with the products they loved and, in return, offer them something they didn’t highly value? Not a recipe for success.

You get the picture. What to do? My recommendation is this: When management comes pounding on your door asking for an incentive plan, begin by asking questions—lots of questions. Here a few of my favorites to get you started.

What, specifically, do you want to achieve by putting an incentive plan in for these employees?

What specific improvements—behaviors and outcomes— would the incentive plan be designed to drive?

Why aren’t these improvements happening now? What’s preventing them from taking place?

What kinds of difficulties or obstacles might employees face in trying to make these improvements happen? What might thwart their efforts to succeed?

If there is an incentive, how will employees respond to these difficulties and obstacles? How will they try to overcome them? What will they most likely do? Is this what you want?

Do employees have what they need—the skills, experience, systems and support—to overcome these difficulties and obstacles? If not, what is lacking?

Probe hard, push back and don’t quit until you get the answers. Only then will you know whether and how you should design and implement the incentive plan being requested. If my experience is any indicator, you will discover that there are some basic organizational, management and communication issues at the center of the performance problem. Much as our management "customers" might like to believe the contrary, incentives are not a sound substitute for an effective organizational structure, good management practices or clear and regular communication.

Incentives, at their very best, are all about focus. Well-designed and well-implemented plans can focus employees on the few key things where you need them to really move the bar. That’s their unique strength, among all other rewards. When organizations try to use incentives to do their general management and communication tasks for them, they end up building in too much discretion, too much complexity or just too many measures. With this, we bleed the incentives of their particular power and advantage, and they become just another way to distribute pay.

Better to use your investigative skills to discover and define the exact nature of the performance challenges. Then you are in a position to cull out the broader management, organizational and communication issues which must be addressed with foundational-level improvements, and pinpoint those areas where incentives can have a positive impact.

Performance, as W. Edwards Deming told us, is a systems thing. It is complex and multifaceted. Incentive plans, or any other reward vehicles, cannot drive the performance-improvement bus alone. Unless you identify and remove the barriers to performance, and create the setting in which performance improvement is possible and even likely, throwing incentive money at the problem will likely have little positive impact and could produce some very real negative consequences.

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