Incentive Plans

Before deciding on an incentive plan, an organization must have a strategic need identified. Depending on the size of the organization some key reasons for creating incentive plans include; attracting new employees or retaining existing ones, reduction of taxes, or planning for retirement.

No one size fits all incentive plan exists. Each organization needs to tactically implement an incentive plan. The organization must also keep strategic goals in mind as the tactical plan is developed.

Evaluation and Strategy

The first step all organizations must take is an inventory of any existing incentive plans. The inventory should include not only a description of the benefit, but also the cost to the employer and employee. The organization will then be able to analyze the cost versus benefit of the incentive as well as compare the results to industry standards.

Sifleet (2004) suggests first comparing pay and benefits with employers in the same geographic area. After this baseline is completed, organizations can use incentives to motivate employees. Specifically, list which behaviors the organization wishes to encourage and discourage. Organizations must also list the outcomes in a measurable way.

Finally, Sifleet (2004) emphasizes the need to put the plan in writing. This step is easy to put off, especially for smaller organizations, but is a critical and inexpensive way to test alternatives. The written plan provides an objective look at the data, identifies assumptions, and enables easier feedback from others. The results of this effort may not be immediate, but the benefits are real.

Not only do individuals react differently to differing incentive plans, but different classes of employees also need to be motivated in different ways. Lopez, Hopkins, & Raymond (2006), found salespeople were most motivated by increasing commissions and least motivated by promotion or recognition. This reinforces the need to have specific, measurable outcomes which match an organization's strategic goals.

Incentives do not always have the desired effect on performance. For this reason, objectifying all the outcomes of an incentive plan in measurable terms is important. Kohn (1999) even cites studies during the last three decades which conclude people expecting a reward for successful job completion are outperformed by people who do not expect a reward.

To explain why incentives fail, Kohn (1999) lists four reasons:

1. "Rewards punish." Rewards are similar to punishments. They are "not opposites at all; they are two sides of the same coin." Employees feel manipulated in either case. A long-term problem with using rewards is "the need to raise the stakes and offer more and more threats or threaten more and more sanctions to get people to continue acting the way we want."
2. "Rewards rupture relationships." Teamwork is rapidly gaining acceptance in both the academic and business worlds. Functional teams are a vital prerequisite for organizational quality. Incentives which do not reward collaboration in many cases interfere with an organizations sense of community.
3. "Rewards ignore reasons." By simply dangling an incentive in front of an employee, management does not need to address the underlying reason for the needed incentive.
4. "Rewards discourage risk-taking." Creativity suffers when rewards and incentives are introduced into the workplace. When driven by rewards, an employees "focus is typically more narrow than when no rewards are involved." Incidental learning suffers as employees do exactly what is needed to get the reward, not necessarily looking to improve the task or find better alternatives.

While incentives can be helpful in reaching organizational strategic goals, care must be taken to create a tactical plan with specific, measurable objectives. Taking an inventory of the organizations existing benefits and incentives plan along with a comparison to local and industry standards is a requirement. Putting the incentive plan in writing and soliciting feedback will clarify the measurability, feasibility and effectiveness of the plan.

Teams have also become a critical component in most organizations and incentives must not conflict with their functioning. The appearance of favoritism, or incentives which seem out of reach for certain employees, can be counterproductive for the organization. Finally, employees who are motivated solely by the incentives provided will have less interest in the actual work.

Kohn, A. (1999). Punished by rewards: The trouble with gold stars, incentive plans, A's, praise, and other bribes. Boston: Houghton-Mifflin Trade and Reference.

Lopez, T. B., Hopkins, C. D., & Raymond, M. A. (2006, Fall). Reward preferences of salespeople: How do commissions rate?. Journal of Personal Selling & Sales Management; Fall2006, Vol. 26 Issue 4, p381-390. Retrieved December 12, 2007, from EBSCO Host.

Sifleet, J. D. (2004). Beyond 401(k)s for small business owners. Hoboken, NJ: John Wiley & Sons.