How to Successfully Design and Implement an Incentive Program
by Mike Higgins, Jr.

Incentive-based programs are increasingly popular in today's workplace.  However, many programs fail despite the best intentions of an organization and the professionals who designed it.  Here is a list of 14 rules to follow in order to successfully design and implement an incentive program in your organization.

1. Never place base pay at risk.
Placing base pay at risk is the same as asking employees to wager their standard of living on factors that are beyond their direct influence.  Instead, use base pay and incentives as a part of your overall compensation strategy.  Keep base pay competitive within the market and let incentives take overall pay to the high-end of the market or beyond. 

2. Make sure everyone participates.
Limiting incentive programs to a few individuals effectively "benches" the rest of your team.  Getting everyone involved unleashes the untapped potential lying dormant in an organization.  It will also make everyone feel like they are part of the team -- a motivating factor that reduces employee turnover.

3. Align incentives with strategic objectives.
Incentives must be aligned with the overall strategic and tactical objectives of your organization.

4. Utilize a "balanced scorecard" of measures.
The shortcoming of many traditional incentive programs is that they are one-dimensional.  Employees soon figure out a way to maximize their incentive at the expense of some other part of the organization.  A well-designed system uses multiple measures that balance growth with profit and quality with productivity.  This "counter-balance" approach forces employees consider the impact upon each measure when making a decision.

5. Reward for results, not activities.
Rewarding for activity leads to more activity (and often, increased expenses).  Rewarding for results translates to more dollars on the bottom line.

6. Establish an equitable starting point from which to measure performance.
Unrealistic expectations in a performance measurement system will damage its credibility before it begins.  Instead, establish a reasonable threshold or baseline of performance that justifies base pay and reward for performance beyond that.

7. Utilize stretch targets.
Once a baseline or threshold has been established, create stretch targets.  A stretch target is a level of performance that is maximizing the potential of an organization or unit.  Stretch targets encourage "out of the box" thinking and behavior.  In order to maintain credibility, break up the gap between the baseline and stretch target into increments, creating progressively larger rewards for achieving each increment.

8. Weight measures mathematically.
In any program where multiple measures are used, some mechanism is required to determine their relative importance to one another.  This is usually a very subjective exercise.  If you are rewarding for results, and not activity, you can weight each measure mathematically, based to the economic value each measure creates in relation to the others (e.g., a measure that creates twice as much economic value as another should be weighted twice as high).  Doing so will help establish priorities in your organization based upon profitable decision-making, not intuition and misguided intentions.

9. Self-fund the program.
Fund your incentive program by sharing a portion of the improvement in profitability beyond the baseline or threshold.  This will teach your employees to think and act like owners.  Funding your program any other way will simply create an entitlement mentality.

10. Create incentives at multiple levels.
Reward employees for organization-wide, unit and individual objectives simultaneously.  In a well-designed program, individual measures are linked to unit measures that are linked to organization-wide measures.  This creates "line of sight" for employees -- an understanding of how their day to day activities impact the bottom-line.  It also focuses everyone upon organizational success and teamwork, not departmental infighting.

11. Never place a cap on the amount of reward that can be earned.
Performance will stop once the cap is reached.  If your reward program is based upon results, and not activities, your bottom line will continue to improve no matter how much is paid in incentives.

12. Include a consequence for underachievement.
In the same manner that an incentive pool is created for improvements in performance, penalize the reward pool, but never base pay, by the amount of deterioration in performance.

13. Create an additional, deferred incentive for key managers and executives.
Creating an additional, deferred incentive for key managers and executives has three benefits.  First, a deferred reward that is at risk will force your key decision-makers to take actions that are in the long-term interests of your organization.  Second, it will create a golden handcuff to retain and motivate your very best talent. Third, it will cost next to nothing since it only involves a small number of employees.

14. Provide frequent feedback and coaching.
This is the single most important aspect of any program, incentive-based or otherwise.  Your organization's overall level success will be directly proportional to your employees ability to understand and influence the measures upon with the are rewarded (e.g., Success  =  Understanding  X  Ability to Influence  X  Motivation^2 ).


Mike Higgins Jr. is a consultant who specializes in designing and implementing reward programs.  Mr. Higgins' consulting firm, Mike Higgins & Associates, has installed their reward program called Performance Compensation for STAKEHOLDERS in over 400 organizations in the United States and abroad since 1989.  Mr. Higgins can be reached directly at (816) 753-4104, via e-mail at mhigginsjr@msn.com, or on the Internet at www.mhastakeholders.com.

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Copyright 1999 by Mike Higgins Jr. All rights reserved.

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