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
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
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
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
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
13. Create an additional, deferred incentive for key managers
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 firstname.lastname@example.org,
or on the Internet at www.mhastakeholders.com.
more articles in The CFO Refresher in The CEO