Incentive Pay: A Balancing Act

Since the beginning of commerce, organizations have looked for ways to motivate workers. Incentive pay has always been a go-to and has grown in recent years. While there is some debate on whether or not incentive-based programs work long-term, I would venture to say that the effectiveness of these programs relies heavily on effective management and healthy company culture.

The Harvard Business Review (HBR) argues that reward-based incentives, be they financial or otherwise, do not inspire long-term motivation. While they may work in the short term HBR argues that long-term, they can have the opposite effect, encouraging employees to expect additional rewards for their work in order to be productive. While this argument does have some merit, it is primarily based on classroom and research settings. In these settings, long-term incentives are difficult to maintain and culture acts differently.

In addition, HBR argues that companies often turn too quickly to incentive pay as an easy fix, ignoring underlying issues that may affect productivity. Incentive creates a focus on financial considerations, ignoring the need for workers to find meaning in their work and relying solely on the promise of reward to motivate employees. Human Resources experts agree that this approach is unwise. Often, a lack of innovation and productivity is rooted in declining company culture or employees not feeling valued in the workplace. Providing incentive pay without addressing these issues may help in the short term, but in a workforce that is increasingly looking for meaning in their work, these efforts are ultimately doomed to fail.

While the HBR research focuses on the ineffectiveness of incentives in a classroom and/or research setting, other studies done in operating organizations have found more success. In a study done by WorldatWork, 74% of respondents claimed their company’s incentive plan was helping them to reach a goal. When an incentive plan is properly designed and workplace culture is sustainably healthy, these programs have proven to be effective. In addition, this same study found that incentive pay programs were most effective when they included a large number of employees. When the programs included only a few employees, those employees did not find long-term motivation from receiving that incentive.

Some organizations utilize pay incentives to fill economic gaps. Rather than paying employees increased base salaries, they base the team or individual’s pay off the organizational profits or team’s productivity. While this can be exceptionally motivational in the long term, this is what HBR is warning against. Relying on incentives, that may not be repeated, to make an employee’s salary competitive can be a gamble. Top performing employees may choose to go elsewhere in order to feel secure in competitive pay. Experts suggest that effective incentive programs must begin with treating employees with respect and understanding, this includes competitive pay.

Incentive pay has been found to be effective across industries, particularly in sales motivated positions. Offering incentives can provide your employees with motivation to go the extra mile, but experts agree this is only true in organizations that have established a foundation of trust and respect. When incentive pay in implemented respectfully and employees feel they are your priority and not the bottom line, they are more likely to work harder, achieving both short-term and long-term goals.