It seems that short-term incentives (STIs) have a penchant for causing a lot of unhappiness for those participating in such plans. Day after day I receive feedback from both line and HR that their incentive plans are causing angst. Everything gets raised as issues. From the wrong people receiving incentives to plans paying out when the company can’t afford it or not paying out when people have worked incredibly hard… the list goes one.
There’s no getting away from it –incentives have always divided opinion, and probably always will. That’s because they’re tied up with human behaviour and motivation, and there are as many different views about that as there are definitions of performance.
And what that balance is will depend on the kind of people your organisation employs, the roles your people fill and the cultural, economic and socio-political environment in which you work. So it’s more a question of ‘best fit’ than ‘best practice’.
As a consultant working in performance and reward for two decades now I am no longer surprised by the divided opinions that I come across. But I still do get surprised at how many times organisations, senior leaders included, are not prepared to take a detailed review of their plans given the overt dissatisfaction that they relay to me. And even more surprised if there is a preparedness for said review to be focused on “what are others in the market doing?” or “how much do others pay at these levels?”
While there are a number of ingredients for making incentives work – there is no recipe. To create the recipe, organisations need to determine the right mix and balance of the ingredients, including:
- Financial vs non-financial rewards
- Individuals vs teams
- Multiple payments per year vs once per annum
- Large quantums vs low quantums
- Discretionary plan vs formulaic plan
- Organisation vs team vs individual performance weightings
- Quantitative vs qualitative metrics
- Cliff face design vs incremental payouts
- Steep payout vs shallow payout slope
- Stretch vs easily achievable targets
- And so on.
It's also important to remember that the balance on each of these ingredients will differ depending on the combination of these elements:
- Organisational life stage - a start up with limited cash flow potentially more in incentives and less in fixed than a mature cash rich organisation
- Employee segment - for example sales versus support staff where the former will have a higher incentives to fixed ratio
- Employee level - executives will have more variable leverage than clerical staff for example
- Sector - financial services more leveraged for example than the community care sector.
And this without even considering employee preferences that can also come into play. Some organisations have built flexibility into their incentive plans to cater for individual needs. Not all employees are motivated by money, some are more motivated by status or public recognition maybe and recognising these differences can go a long way to using incentives to truly motivate their people to superior performance.
Using market practice and data to understand the competitor landscape for talent is important but using that understanding to inform the design of incentive plans that motivate and drive the right behaviours and outcomes for your own specific organisational context is even more important. Don’t be scared to break new ground, the quest for superior performance is not going to be fulfilled through following the herd – it may take guts but doing what everyone else does will get you no differentiation and almost certainly not help you create a performance edge over your rivals. Doing what everybody else does will simply become the norm, to the extent that STIs become irrelevant!
So next time you want to review your STIs please take the time and effort to go beyond simply benchmarking against the market and go through a thorough review and design process with your own circumstances and context in mind.
Think about the opportunity cost of not doing STIs properly, surely the average costs* of incentives being 10% of salary makes it a worthwhile endeavour to ensure ROI on this spend!
* Based on Korn Ferry database of 455 organisations and nearly 300,000 jobs at February 2016