10 Myths About Employee Incentive Programs

by Lynn Truong on 28 September 2009 17 comments

Employee incentive programs are popular, if only because they are prolific. They range from industry standard sales commissions and other pay by performance jobs to more individual-specific benchmarks, but companies use them freely and generously. Though conventional wisdom tells us otherwise, many will argue that these programs are not just ineffective, they are detrimental. Before deciding to implement an incentive program for your small business, let's look at the top 10 myths about them.

1. It boosts morale.

One of the biggest reasons companies use employee incentive programs is to boost morale (and hoping that the boosted morale would in turn boost productivity). This is a shortcut, and one that doesn't solve the underlying problem. Morale usually not low due to a lack of incentives. Typically, morale is low for reasons like bad management. Offering gifts or cash in exchange for extra work doesn't address this.

Companies often relate morale with compensation. The adage that more money means more happiness is pervasive in corporate culture. These programs are often thought of as "throwing a bone" to their workers so that they'll be happy and productive. It might create a short burst of increased productivity, but because the actual cause of bad morale is never addressed, the problem creeps up again and again. Over time, the company might blame the workers for being greedy and unreasonable when they're using the wrong remedy in the first place.

2. It shows the company is generous.

You aren't fooling anyone. You're not doing this for your employees. You're doing this for yourself. It is a purely selfish deed. You are offering your employees something in return for something else. This isn't a gimme, a gift, or an act of kindness.

Management sometimes get confused when workers aren't more enthused or appreciative of the program. From the company's point of view, they're offering something extra, a bonus, an opportunity for more cash. From the workers' point of view, they're being asked to do more and work harder. The incentive is usually viewed as additional compensation for additional work. There's nothing generous about it.

3. It boosts productivity.

If your problem is productivity, consider whether you've provided all the tools and resources available for the productivity standards you are looking for. If you are too cheap to buy your workers new computers, but are frustrated that they're siting around idly while your tech guy has to diagnosis yet another problem on their computer, offering incentives to be more productive will simply cause more frustration. Your workers will see your demands as unreasonable since you haven't provided them with the tools to be productive in the first place.

A problem with productivity is usually caused by a flawed system. Inefficiencies often build up and cause bottlenecks in the workflow. Ask your workers if they have suggestions -- they're on the ground floor, experiencing it every day. They might know better than you.

4. It provides motivation.

If motivation is the goal, then an incentive program will provide it -- it will provide motivation to get the reward. But usually, that's not the kind of motivation companies are looking for.

The difference is that incentive programs provide extrinsic motivation where you were hoping for intrinsic motivation. Extrinsic motivation, offering rewards for action, provides an empty pursuit for the reward itself. Intrinsic motivation is what pushes people to do better. Morale, leadership, and vision contribute to intrinsic motivation. No incentive program can provide intrinsic motivation. The best you can hope for is extrinsic.

Understanding this limit of incentive programs will go a long way in crafting one with realistic expectations. While incentive programs will never provide you with things that result from intrinsic motivation, such as higher quality or creative expression, these programs can still be used to encourage very specific and quantifiable objectives.

5. Metrics are infallible.

When companies rely too much on metrics, a lot of the details get lost. Metrics are often a very small piece of the puzzle, but companies use them to translate all sorts of big picture theories. Quality gets lost in the race for quantity, because metrics are really only able to measure quantifiable things. When you use metrics as your standard, you are using a very small piece of the puzzle to define the entire picture.

When you use metrics to reward an outcome, you often shift your workers' focus from the big picture to a small part of it. Instead of doing their work better, they do a very specific and particular part of it better. While your intention was to produce a better picture, you end up with a perfect puzzle piece. It's a very inefficient way of raising overall quality.

6. The reward is most important.

Whether the reward is cash or just recognition, studies show that the type or amount of the reward makes little difference -- it's the incentive structure itself that defines the effect. Basically, spend less time on the details of the reward, and more time on constructing a valuable and effective program.

While nothing really compares to getting cold, hard cash, nonmonetary rewards offer employees some tax free benefits.

7. A little competition is good for the workplace.

Incentive programs that do more harm than good are usually the ones that involve competition. When you identify winners, there will always be those that feel as if they've lost. When you incentivize individual gain, you discourage teamwork. When you offer high stakes, pursuing creative freedom becomes too risky. By making them compete for limited spots, you devalue the variety of talent.

Friendly competition can be had if the reward is small and the task is inconsequential. Having sporting events outside of work, or offering awards for small things like "cleanest office" are fun and contributes to the overall work environment. But pitting them against each other on their work skills is a formula for disaster.

Use programs that are open-ended and inclusive where any number of workers can meet the goals and no one loses because another won.

8. Incentive programs give employees a sense of ownership in the success of the company.

While it's true that recognition and compensation contributes to their sense of ownership in the company, incentive programs specifically don't do this. There's a fine line between an employee's sense of worth and value to the company when he or she receives unexpected recognition and sincere appreciation and negating that completely with incentive programs that offer compensation in exchange for work. Having management that provides solid leadership, positive feedback, and proper guidance can provide a sense of ownership that no amount of compensation can.

Profit-sharing programs are often instituted as a way to get that sense of loyalty to the company. However, as an incentive program it's difficult to measure success and effectiveness. So many factors contributes to a company's bottom line that a profit-sharing program may focus disproportionally on some factors while ignoring others. It's the program that provides the least amount of control over specific objectives, and offers many ways for employees to make out on the hard work of others.

9. Our employees won't try to game the system -- we have a good relationship and we trust each other.

Employees don't game the system because they are spiteful or disrespectful. They're only following your lead by placing importance on particular metrics that you've asked them to improve. When too much emphasize is placed on incentive programs and the rewards that they offer, the collective focus turns to it. Employees then shift their energy into getting the reward (because that's what extrinsic motivation does). The gaming is inevitable. It might not affect the numbers directly, but it makes the employees value the numbers disproportionally.

10. If an incentive program isn't working, it just needs a few tweaks to make it perfect.

When companies rely on incentive programs for results, they are assuming that their employees simply lack the right motivation needed for them to do their job fully. When incentive programs don't work, they rarely consider that perhaps it's not incentive the workers need, but something much deeper.

Ask yourself if the solution to the problem doesn't lie on your workers, but with your business structure. Is there one particular manager who is not able to get along with his or her team? Have you really listened to the comments and suggestions given by your employees?

 

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Guest's picture

I've seen too many short-sighted decisions made by people who wanted to pad their bonus numbers. I think that many of these incentive programs do more harm than good to an organization. When the focus is limited to the current year, improvements that may take longer than one year are sidelined, and the quick fixes are implemented first. I can see this at my current job, where rather than creating a sense of ownership, the incentive program is encouraging people to "get it while they can" rather than thinking about the long-term health of the company.

Guest's picture
heropsycho

I gotta say I completely agree. My employer only differentiates pay based on how many hours are billed by each consultant. The result? People try to bill as many hours as possible, and don't care about quality of work, nor are most consultants willing to contribute to the team that would help everyone be more productive. Can't do that effectively anyway because, just as the article alludes to, we're not given the tools we need to do so. And since management hasn't given any increases in salary (in fact, total compensation has declined in the years I've been working here due to not covering as much of the cost of insurance and ending the 401k match), they're resented. And it patently leads to unfair scenarios. For example, I happened to be available for one project that unexpectedly turned into a long term full time staff augmentation project, so I'm getting large bonuses, while my co-workers mostly get nothing because the economy is down. I'm not working any harder than they are.

Guest's picture
Guest

Hewlett-Packard has been notorious for the failed incentive program since the Fiorina days. Management can't seem to fathom why employees weren't responding to a recently cut gift card bonus program, and other incentive plans.

Never mind the fact that most employees haven't seen a raise or promotion in 6 to 7 years while work loads have tripled for most; vacation time can no longer be rolled into the next calendar year; opposite-sex domestic partners have been purged from health insurance enrollment; employer contributions to 401(k) plans were halted last year; all employees were required to take at least a 5% pay cut this past year; and they laid off more than 20,000 employees in 2008 alone, with several thousands more laid off so far in 2009.

Add to that the fact that CEO Mark Hurd took a $42.5 million total compensation package for 2008 and just this past month the IT Director (I think that's the position) and the CFO, among other upper management positions, received enormous pay bonuses. I understand that most of these bonuses are built into employment contracts at the upper level. But, honestly, why aren't these contracts being renegotiated?

In short, upper staff levels continue making money hand-over-fist (despite having taken paycuts themselves) while they shiv the lower level staff and move jobs overseas to remain profitable. And they wonder why employees are less than happy.

Many HP employees I know feel the situation is a huge injustice, but given the current economy, they don't feel that they can leave. I wonder if HP has even considered the productivity that they're losing when employees commiserate. I hear my fiance on the phone several times a week swapping injustices with other HP'ers. It certainly doesn't inspire them to work harder or longer hours.

(Remaining anonymous so my comments don't bite my fiance in the butt at work.)

Guest's picture
Steph

I have seen incentie programs work: I used to work at a call center and they had great incentives and we all worked harder when the bonuses were good. However I understand where you are going with this blog.

Also, I think a good Budget planner is important, otherwise the company might overspend.

Guest's picture
Robert

I've never been part of an employee incentive program, but it seems pretty bogus to me. More like a PR move that everyone sees through.

Guest's picture
Joe

Bonus plans have to be well thought out, there are some companies who give unrealistic bonus plans which demotivate the employees, and there are some which promote the employees to commit gross misconduct in order to achieve this plan..which in return damages the company and also the employees futures.

Financial Samurai's picture

I'm absolutely for incentive programs and believe they do more good than harm. Obviously, when we're in a recession, it doesn't work to well, but in the good times, it works amazingly well.

An incentive program is much better than nothing. Nothing breeds socialism.

Keigu,

Financial Samurai
"Slicing Through Money's Mysteries"

Guest's picture
O

I've been employed for nearly 30 years at this point in a wide variety of companies and industries, from tiny startups to huge private and public organizations. I have been subjected to just about every incentive type of program there is. NONE of them worked. I like working. I like a good job. And the benefits and incentives that worked boiled down to rewarding me fairly on a day-to-day basis (salary), providing a clear path for growth in the organization that worked (IE you actually could travel it) and by far the biggest, having a good manager.

So far the incentive programs that have failed include bonuses, stock options, ticky tacky stupid gifts and parties and rah rah 'acknowledgements'. It has been a long time since any employer I have had took seriously the idea of promotions and raises to reward good work - for anyone at the company - not just me.I haven't had a good manager for the last 9 years in 4 different jobs. I had one OK one and three bad to awful managers. I am in a managerial role myself and have had many management training classes, both good and bad. In 30 years I have had four really good managers (ALL of them in the first ten years) and two OK managers and six really bad managers. It seems to me that managers are getting worse. Nobody offers the training I got early in my career let alone the mentoring and examples.

Financial Samurai - money talks - promises don't. And options and bonuses are promises that all too often turn out to be just that.

Financial Samurai's picture

Hi O,

I guess I'm just an optimist then, and am relatively happy with management and the incentive programs they've put in place for us. I've been at my firm for about 9 years now, which is a life time considering how much job hopping there is in the finance industry.

The past 18 months have been rough, and have diluted incentive programs. But, when the good times return, as I know they will, these incentive programs provide a tremendous amount of loyalty and pay alpha.

We're going to start up a lively chat on Wall Street Regulation & Pay over at FS if you want to participate. "Wall Street Pay Regulation: How To Create A Win Win Situation" The author herself retired by 45, and worked on Wall St. for 15 years out of business school. She'll be answering questions.

Keigu,

Financial Samurai
"Slicing Through Money's Mysteries"

Guest's picture

In too many companies incentive plans are a false bait. The use the promise of an incentive to get employees to run faster and jump higher. While it makes sense from an employer standpoint, they can be confusing, difficult to achieve (except under the most favorable circumstances) or end up being substantially less than most people originally thought.

The other problem is when companies move a greater percentage of the employees income to incentive--that's a thinly veiled attempt to control costs, and little more.

With that kind of scheme in place, morale can drop like a rock in a recession. That may help from a budgetary standpoint, but for employee morale, it's a killer!

Guest's picture
Rosa

I've seen sales incentives and deadline incentives work wonders on a team, but it requires some basic good management and retention practices to start with - among other things you need to know most of the team is going to be there next quarter, or they'll just pull in future sales before deadline, or do sloppy work that's fast. I used to get a 10% quality bonus on my contract work - that sure spikes your attention to detail!

But in general, either the incentive is so small that it's useless (my partner gets profit-sharing incentives that are about 5% of his total income, and they either come or don't, he doesn't have much control or pay much attention) or they incent the wrong things - if you pay a big bonus for one specific thing, like the billable hours heropsycho mentioned, you're going to get that one thing at the expense of others.

Guest's picture

Great post, I agree that incentives programs work but not possible in every company.

Guest's picture

I worked for a company that would increase the responsibility for my department in an effort to save on hiring costs, and plied us with the carrot of one of two available garage parking spots if we performed to expectation. Kinda nice, right?

Wrong. These were spots that were part of our original contracts that had been forced out of our benefits to use as an incentive to recruit new producers to the company.

Since the market tanked, we've only attracted TWO new producers after losing twenty. The parking spots we used to enjoy now sits empty while seven of us compete monthly for one spot's use. (By the way, the company might take that single spot away from us, too - if we ever recruit those producers....)

Guest's picture

I think it's fair to say that incentive programs are not a pancea for poor management, sub-standard wages, or poor internal communications. And I think it's only fair to separate the bonus-linked work incentives that are offered to managers (more of a compensation factor) from employee recognition and reward programs that engage (mostly) line staff.

I work for a company that supports employee incentive programs and clients that have carefully thought through the objectives, audience, value proposition and communications underlying their programs find the most success. Steph mentions an effective call center application. This is a metrics-driven work environment that is typically fraught with churn. Giving managers a platform from which to recognize excellent performance and reinforce the important role the employee plays in organizational success can easily spur performance...and even the slightest improvement in retention can have a dramatic impact on the bottom line.

Everyone responds differently to incentive programs. Most of the posters here appear to be experienced and management/contractor types, not a group that's going to get excited or motivated by a group hug or public recognition from their manager. It is internal marketing - the key is designing a program with the right offer and approach for the target audience.

Find more info on incentive programs at Loyaltyworks.com

Guest's picture
coldjoint

until 2 days ago i worked for fidelitone logistics in wauconda illinois. they recently implemented a incentive program. there was to be a nine week ramping up period with feedback weekly on employee progress. this did not happen. scores were posted in some departments, but i heard verty little interaction between management and employees. this interaction was the responsibilty of management as stated in an AIM pamphlet i recieved. AIM being the acronym for the incentive program.

at fidelitone parts are picked and packed, these parts range in from the smallest screw to large plastic pieces such as yard vaccum tubes and outer shells of various machines. needless to say the larger items take much longer to pack. i asked mif the computer made the distinction between such parts. it took me quite a while to get an answer which came about a half an hour before they came to fire me or lay me off. i asked these questions because my scores were low and i work very hard.(i can produce many co-workers that say i worked too hard). what i wanted was a chance at the incentive pay like the workers who get the smaller much easier and therefore faster items to pack. i never found out what their intentions were because i decided to speak my mind and used some very strong terms. my answer was the computer makes no distinction between parts which to me is patently unfair verging on ,if not,fraudulent. also the are layoffs already and weeks prior to the nine week ramping up period, which the pamphlet the company gave said would not happen without a series of write ups. these things did not happen. i am a retired laborer and was always treated as a man until this job. i think this company needs to be exposed as they want above average for way BELOW average pay.

Guest's picture
coldjoint

firstly, let me apologize for some typos in my first comment.i hope i got the point across. the atmosphere at fidelitone is one of overbearing intimidation in a time when jobs are scarace and the whole country is trying to get back on its' feet. everyday employees wonder if today is their day to lose their job. if anyone reading this thinks ther is any legal action that can be taken i would apprecate any advice. i will find another job, evetually,but i wish fidelitone could be told to quit their draconian behavior in this time in our country. by the way, average wharehouse labor is 10 to 12 dollars an hour they pay 8.50 to 9.00. also the standard of their incentive program is set at c+, again which is above average. oh, about 2 people are making standard out of well over a hundred. this is accomplished because management can give delay time to whom they chose.favoritism also runs rampant at fidelitone. these are my opinions after working there for very close to 2 years. respect costs nothing.

Guest's picture
Tyler

Your # 6 myth is especially right on. Unfortunately there are a lot of "incentive solution providers" whose main objective is to get you to purchase their merchandise, gift cards etc. They don't focus enough on the process i.e. clearly communicating goals and expectations, consistent positive reinforcement etc.