The Power of Incentives

You may be too embarrassed to admit it, but you loved National Lampoon’s Christmas Vacation. The Griswold family Christmas tree, the kitty litter in the Christmas Jell-O, a million lights on the rooftop, Cousin Eddy in a bathrobe pumping the RV sewage into the storm drain…Such a classic, isn’t it? And of course, let’s not forget the protagonist, good ole Clark Griswold. Loving father, doting partner, and dutiful employee... Before the year-end bonus arrives in the mail, Clark’s already floating a cheque – a big cheque - as a down payment for a family pool. Unfortunately, the boss has a different incentive program in mind this year: Membership in the Jelly of the Month Club. Now we have a bounced cheque and lots of drama. 

Several years ago, the New York Times reported on the rise of variable compensation in the workplace. What’s variable compensation? Short-term bonuses and incentives. In 1988, incentive pay accounted for only 4% of corporate payroll; by 2014, the number had risen to 13% and has continued to rise significantly since. In 2018, PayScale reported that 71% of employers now use variable pay as part of their overall compensation strategy.  Not just for executive management either - these creative compensation plans are for all levels within the organization. What’s the advantage of variable compensation? Lower fixed costs for the company and alignment of compensation with performance for employees. If done well, incentives can dramatically move the business forward. 

 Alignment to Purpose and Culture 

In my last article, I spoke about putting culture before the bottom line…here is one way to demonstrate a commitment to such. For variable compensation to work effectively in an organization, then they must be tied directly to the purpose and culture of your business. The failure to link compensation to culture is one reason so many companies are struggling with a crisis of employee dissatisfaction and poor engagement. 

When designed with culture AND business outcomes in mind, incentive programs can be highly effective and drive significant business success. They can be used to mould employee behaviour, specifically those behaviours aligning to the corporate purpose and culture and reinforce those who lead by example. 

Unfortunately, when these programs are designed poorly, they may put a company at risk – as evidenced by companies we’ve seen reported in the news over the last couple of years, causing a whole new swath of regulations around this very topic.  Metrics and bonuses that seem to make sense in delivering business value may have the opposite effect and significant negative consequence to its customers or brand. That said, incentive programs are highly effective if done with a focus on the purpose and culture of the organization. 

Best Practices 

Focus on both short- and long-term objectives 

I’ve seen too many companies (albeit primarily public companies), operate quarter to quarter, often incenting “unnatural” behaviour and actions to deliver a short-term result. While this is important to ensure shareholder expectations are met, there must be a balance against long term strategic objectives and to ensure sustainability and growth. 

 One Size does NOT Fit all 

There needs to be a recognition of actions, behaviours and metrics that deliver along the entire value chain. Too many times, the rewards and recognition go to the front line sales people when there is an army of colleagues delivering alongside or behind the front lines. Different roles, different segments and different geographies may require different metrics or incentives. 

Give Employees what they will value 

Create compelling and meaningful rewards; ones that motivate the employees and have impact to them personally. 

Test the plan 

Unfortunately, there are many people who will attempt to “game” the system – these are the stories we’ve seen splashed in the news, creating new regulations and audit requirements to prevent or catch such. Before implementing your new program, test your theories – particularly with objective third parties who will challenge you and attempt to poke holes in it.  

Be transparent 

Employees should understand not only how and what they are being measured and incented for but WHY. They should be clear on how their behaviours and their personal performance contribute to the organization’s culture and overall success. 

No Jelly of the Month Incentives 

Variable compensation programs and incentive plans will continue to be a key component of organizational talent strategy and they are most definitely here to stay. Don’t let your performance program be the cause for employee dissatisfaction, poor teaming and a toxic culture. Make sure your programs reflect the company’s values and are structured to drive behaviours that are beneficial to both your organization and the customers it serves. And make sure that the incentives are meaningful and impactful to the employee – no Jelly of the Month Club!