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Staffing Resource Center

Dangling Carrots

Quarterly bonuses. Weekend getaways. Profit-sharing.

Over the years, HR managers have implemented all types of performance-based incentives in an effort to devise the "perfect" reward system--one that promotes the attainment of both corporate and individual goals. But despite countless on-the-job experiments and years of research on the topic, one fundamental question remains: Are pay for performance programs really good for business?

That depends. Any number of variables--including company goals, employee motivations, corporate culture and economic conditions--preclude a simple "Yes" or "No" answer. So, the more relevant questions are: Is a pay for performance program right for your company? If so, what type of incentives should we offer you?

Designing and implementing a successful pay per performance program requires careful planning and continuous management. To help determine what's right for your business, start by considering the following:

What are your primary corporate objectives? The most effective incentive programs reward performance that supports company goals. So to be successful, your program must address the issues critical to your company's success (e.g., profitability, loyalty, customer satisfaction, etc.) without alienating portions of your work force.

Is your company growing quickly? Research from Hewitt Associates1 shows that companies achieving double-digit revenue growth have the most success with performance-based pay plans. Why? Companies with high-revenue growth can provide adequate administrative, communication and monetary support to properly implement the incentive plans. For companies with single-digit revenue growth, the costs of performance-based incentive plans may outweigh the benefits and fail to improve business results.

Do you have clear, objective metrics for measuring performance? Incentive plans work best when they are tied to measurable results. For production-oriented, deadline-oriented, or sales-oriented positions, establishing appropriate metrics is typically straightforward. But in collaborative, creative or service-oriented positions, setting measurable objectives can prove more challenging. Before implementing incentive-based programs for these types of jobs, be sure you can consistently and objectively quantify performance. And in all cases, you must ensure that the individual metrics established are clearly aligned with overarching corporate goals.

Do you want to encourage competition or collaboration among employees? While vying for a company trip may engender a healthy rivalry in your sales department, such competition would be counterproductive in a creative team that needs to work as a unit. To be effective, a pay for performance program must be tailored to create desired outcomes in different work force segments. For example, if the goal is to increase teamwork and promote flexibility, a group incentive plan (such as team- or project-based incentives) will be more effective than individual rewards.

What motivates your staff? Cash incentives or company trips? Recognition awards or completion bonuses? For any incentive system to succeed, the rewards offered must sufficiently motivate your employees to perform. And while some employees may be driven by money, others (including high-performing individuals) are often driven by more intrinsic factors (e.g., sense of accomplishment, career growth, ability to affect organizational change). Before evaluating the potential of performance-based incentives, you must first understand what drives that performance. If you're unsure, take a step back and conduct some informal research. Find out what motivates employees in a wide variety of organizational roles. Use those motivators as the basis for building a pay per performance program that will support employee and corporate goals alike.

Rewards can be counterproductive...

Before implementing any incentive program, carefully consider the potential downside. Alfie Kohn2, author of Punished by Rewards, believes that rewards programs can't work because we don't thoroughly understand human motivation. He purports that rewards may actually damage quality, lower productivity and cause employee apathy.

Here's why:
  • Rewards provide a way for people in power to manipulate those with less power.
  • Rewards sabotage work relationships, by emphasizing the difference in power between the provider and receiver of the reward.
  • Rewards engender competition and undermine teamwork. One carrot dangled in front of several noses creates an "every man for himself" atmosphere which is antithetic to collaboration.
  • Rewards reduce creativity and innovation. Employees are less likely to take risks when their out-of-the-box thinking could jeopardize their chances for a reward.
To create the workplace outcomes you want, Kohn recommends eliminating rewards programs and:
  • Creating an organization in which people feel a sense of community.
  • Maximizing employee involvement in decision making.
  • Paying employees well and fairly.
  • Doing everything possible to get employees' minds off money and on their work.
1 Performance-based pay plans, HR Magazine, by Ann Pomeroy
2 Pros & Cons of Pay for Performance, by Scott Hays