Creating a Variable Pay Plan

Do Incentive Pay Plans Work?

Argument for Incentive Plans

Well-designed incentive pay plans provide an opportunity for an organization to incent, motivate, recognize, and reward eligible employees who meet or exceed attainable goals and objectives. Without incentive pay, the attainment of these goals and objectives may not be realized. To ensure the success of an incentive pay plan, the plan should be tied to important, measurable strategic objectives, provide appropriate rewards tied to reasonable risk, be simple to understand, and carefully communicated to an empowered team of eligible employees.

Argument Against Incentive Plans

A poorly designed incentive plan risks poor employee cooperation and teamwork, causing organizational friction, tension, and strife while asking the impossible of employees.

Typical Reasons Why Incentive Plans Fail

1. Lack of a strategic plan.

Organizations often make the mistake of viewing incentive programs as a simple do-this, get-that offering, without understanding that incentive programs are fully integrated one-to-one marketing programs designed to change behavior in a positive way. Incentive programs require no less a focus than any other marketing plan, with a written document spelling out the objectives, the ways to achieve them, the strategies to be deployed, and all the other details of the plan, including budget and anticipated results. Once an organization has developed the template for an incentive program, it can be re-used for future programs and by colleagues in other departments or divisions.

2. Impossible objectives.

No matter how motivated your team, they cannot achieve the impossible. Programs often fail because goals are designed based on what the organization requires, rather than on what is actually feasible. People simply tune out when they know the gain is unattainable. It pays to benchmark any goal against what the organization has achieved in the past and what it can realistically be expected to achieve based on the economic conditions in the industry, the competition, and any other issues that could materially affect a desired outcome.

3. Program is based on a closed-ended formula.

In order to control the budget, many organizations (without knowing the name) use what’s known as a closed-ended approach to planning the program, which means that they pre-determine how many people will win. This approach almost automatically guarantees that your top performers will be the only ones to engage, since everybody else will figure they don’t have a chance. The best programs include an open-ended component, meaning that anyone can win based on improving their own performance against some benchmark.

4. Program is based on complicated rules and exceptions.

It’s surprising how many organizations introduce fine-print rules with complex exceptions, and even change rules during mid-program, thinking that they can get away with it. Employees react the same way as consumers do when they encounter fine print on promotions or offers: they become angry. Even if the fine print is well-intended, anything that adds complexity to goals decreases the chances that people will fully understand what is expected of them.

5. Failure to address obstacles or opportunities related to behavior change.

Many times, there exist in organizations concrete reasons why goals fail to be met that have nothing to do with motivation or even with whether or not people know what they have to do. Oftentimes, systems, procedures, or lack of knowledge or communication lie at the root of performance failures. If you don’t identify and address potential obstacles to performance, chances are your incentive program won’t either. A professionally facilitated program planning process that involves key members of your target audience helps make sure you identify hidden reasons why you would not hit your goals even with the most exciting incentives.

6. Failure to engage the target audience.

Sometimes the problem is that the audience you’re targeting doesn’t fully pay attention or engage. They hear about the program but don’t really get that it applies to them or understand clearly why they should focus on it. Engagement can be encouraged by involving members of the target audience in program development, so that the people involved feel that management has listened to them. Or, it can be as simple as having a compelling enrollment package that clearly makes the program understandable and requires people to enroll. Today, this is usually accomplished via the Internet. Even if they work for the organization and would be automatically enrolled, requiring enrollment is a way to get attention and buy-in.

7. Lack of communication or understanding.

Many organizations figure it’s enough to select exciting rewards and announce the program and results will follow. In fact, successful programs include a dedicated multi-touch communication effort that reaches people through every medium possible or feasible, based on the potential return-on-investment. This might include: a Web portal with information about the program such as rules, rewards, tips, case studies, and information on winners, an ongoing e-mail newsletter with useful information and recognition for winners, standing reports to help people see how they’re doing to encourage them along, print pieces mailed to the home, and organization-wide or departmental meetings.

8. Inability of people to do what is required.

It’s not enough to want to do something; one has to be able to do it. Many programs overlook the training component that should work alongside the incentive program to make sure that the key skill sets required to achieve an objective have been identified, and that people have received the chance to address any personal deficits. Incorporating online information and quizzes into your communications program can help.

9. Inappropriate rewards.

Ideally, your program addresses intrinsic needs for success and satisfaction by placing value on accomplishment, and not solely on reward. That said, the rewards send a message to the organization about how much accomplishment is worth. Reward people who have worked a full year to accomplish the goal with a T-shirt, and it’s unlikely you will see a repeat of the same effort in the following year. Rewards should be commensurate with what is asked of people. They should be memorable and involve significant others or the family, if possible, so that key people get regular positive reminders of their accomplishment and of the organization. People get paid to work and perform; rewards are about honoring and recognizing people for special accomplishment in a similar vein as accomplished athletes or performers are rewarded.

10. Lack of measurement and feedback systems.

A surprising number of incentive programs lack formal systems for measuring results such as return on investment and specific outcomes. Measuring results gives the organization useful information that it can use to make future efforts better. Many organizations feel it’s enough to identify whether or not the goals were achieved, rather than to understand why. This fails to take advantage of one of the key benefits of incentive programs; i.e., the ability to specifically target an audience and determine how the effort positively or negatively affected performance. This provides invaluable information for developing future strategies. For instance, if the program is a success, and through analysis you see that no one ever participated in quizzes and very few people read how-to information on the Web site, you can reasonably assume that training is not a clear issue in your organization, at least as related to those performance goals. Return-on-investment measurement is best built into the program from the start. For sales programs, it’s relatively easy to determine the value of performance improvement in terms of the bottom line. For non-sales employees, this often requires establishing a value per unit of performance improvement and then carefully measuring that performance.

In reality

Based upon first-hand experience, most organizations believe that variable pay plans are an effective tool to motivate performance to attain desired results. The vast majority of organizations use some form of short-term incentive pay. Non-fixed compensation complements the financial and non-financial expectations of a successful business model in today’s challenging business environment.

Example: Taco Bell opened 350 new restaurants, and the company’s HR department had a tough time finding managers for all the restaurants. So, Taco Bell asked existing restaurant managers to supervise two restaurants, instead of one. To control the bottom line, Taco Bell kept the restaurant managers’ base salaries the same but offered them 100% in incentive pay. These incentives were awarded based upon:

• targeted profit margin
• customer service
• store sales

After 18 months, the company found that food costs as a percentage of sales decreased, customer service scores were the best the company ever had, and profit records were broken.

As Taco Bell’s Director Michael J. Rowe said, "Believe me, a person who misses a $5,000 bonus payment twice a year will pay attention to the things that drive profitability: sales and customer service."