Incentives – Proceed with Caution

Pay-for-performance approaches, once exclusively the domain of sales departments, are becoming more widespread. The intent is to give employees a stake in the company’s success, with the hope of improving individual performance. These incentive systems can be effective but they can also produce the opposite effect. Naive organizations see these systems as a quick-fix even for complex work situations.

Deceivingly powerful, these systems tempt management, but without sufficient anticipation and planning the long-term impact is often negative. A poorly conceived incentive system can damage a company’s culture for years to come.

What about the intent? Is it wrong to want to reward high-performing employees? We’ve spent years studying how organizations encourage effective behavior and there is no single, best incentive formula. Every situation is unique with its own culture, history, and goals. We use a careful, deliberate approach to improving and aligning work activities. Do not rush and seek an external point of view because extremely important factors can easily be overlooked due to familiarity.

If your organization is considering incentives, however, be sure to consider the following:


Is the opportunity to participate equal for all concerned or will some people have an advantage? One bank executive wanted to increase deposits. The plan: give employees 1% of each new deposit as a commission for bringing it to the bank. This commission was less than the amount that the bank was spending on advertising to obtain new deposits. In this case, though, future problems were easily seen. An employee who gives bank-sponsored retirement seminars would meet hundreds of people a month while a back-office clerk may meet only a few new people. The opportunity to benefit from the incentive would be unequal and this would quickly lead to frustration and disengagement.


Rarely is the effort required to perform a function uniform even for those in the same role. Geographic, customer, and product/service differences can effect how much work is required to produce acceptable outcomes for an organization. Those several organizational levels above can easily be ignorant of these differences but the discrepancies become quickly evident to those performing the roles in question. If a similar incentive is earned with varying degrees of effort the harder working crew can become disillusioned. Without a thorough pre-incentive review to identify differences in effort it is easy for the incentive’s goal to be missed, money wasted, and respect for management reduced.


Is the incentive based on objective input? Sales/margin dollars can be objective. A customer satisfaction rating, for example, must be very carefully constructed if it is to be objective. Incentives work best when based on consistent and objective information – whether from available performance metrics or from a long-tested source. Employees will often try to create an advantage even with objective, hard-to-distort data.


Do employees trust those who will evaluate and tabulate the information for the incentive? If not, the incentive will not have the desired result. Also, trust can not be manufactured quickly. It is fragile and earned over time. One breach and years may be required to heal a situation. A system that is implemented then quickly revised when management sees results accrue too quickly in their employees’ favor will destroy trust and deeply shake respect in managements’ integrity and judgment. A climate of trust and a simulation of possible outcomes are both essential prerequisites for a change in your performance management system.

Bottom Line

  1. An effective performance management approach considers the full range of components that drive employee activity, not just the financial ones.
  2. Incentives powerfully communicate the strategy and values of the organization – how it values its employees’ strategic contributions.
  3. Incentives can be a way to share the benefits of this desired activity with the employees involved.
  4. A poorly-implemented incentive system, however, can disappoint employees, damage performance, and clearly reveal management’s inability to think through a decision.
  5. Handled with care, considered with attention, and placed well, this powerful management tool can produce substantial results.

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