The keys to a successful incentive scheme
September 11, 2015
After designing several, the following are the characteristics we have identified as sound:
- The scheme(s) must be easily understood. For an incentive to work effectively, people need to know what is required of them and what their reward will be once they achieve this. For example, calculations can be supplied to staff if required but beware of assuming people understand calculations that we take for granted eg. Calculating percentages, the concept of contribution etc.
- The development of incentive schemes is subjective. There is no right or wrong. Adding weightings adds to the arbitrariness of a system. We do not subscribe to weightings for this reason.
- There is no such thing as a 100 per cent fair or perfect incentive scheme.
- Although not always easy to divorce certain performance criteria, an individual or team must have control of the outcome of their incentive by the decisions or actions they take e.g. sales, contribution, GP, GMROII.
- The incentive period should be shortest at the lower levels while it can be longer at more senior levels.
- Progress at the lower levels should be visible on a daily basis (or every couple of days) if possible, depending on the scheme, and the employee should be able to get access relatively easily.
- Incentive payouts should be quick, especially at the lower levels.
- Cash payments are extremely motivational but present tax issues.
- There is a place for both team and individual based schemes. Where possible a team approach is desirable without the exclusion of some team members based on individual performance.
- Incentive schemes should not be confused with KPI’s. For example ageing of stock. To include KPI’s in an incentive scheme is a cop out for managers not managing.
- Non-monetary rewards can work well especially in a multi-store environment – recognition amongst peers is a strong motivator. IBM has been clever in the way attainment of targets is made the main goal rather than any financial reward. This has been a major reason for the company becoming successful year after year.
- Changing incentive schemes completely from time to time is desirable, provided it is not seen by staff as a means for management to surreptitiously raise the bar.
- Changing or fine tuning existing schemes is often necessary but ‘creep’ must be avoided. In other words if the incentive scheme is altered and fine tuned continuously, it invariably will become more complex and difficult to understand. It is for this reason among others, that we recommend that the development and changing of schemes is a management responsibility and not a financial or human resource responsibility.
- Any scheme only goes part of the way to incentivise staff. Recognition is important. Those who receive incentives require recognition.
- The design of the incentive scheme must permit changes to allow management to keep employees interested and challenged. Maintaining excitement is a key test, and so the ability to innovate within a scheme is a desirable feature.
- Job descriptions, incentives and company strategies should be aligned.
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