Incentives help create the conditions to improve performance and to meet “the corporate goals of productivity and profitability” (Badawy, 2007, p. 60). Human resources managers should be able to answer why are incentives needed?, to whom incentives should be addressed?, what should be given as an incentive?, when should incentives be given? and how should incentives be given?, in order to plan and implement incentives that fulfill their goal.
Why, To whom, What, When and How?
Why are incentives needed? Because incentives encourage certain desirable behaviours that imply an extra-effort from the employees to better perform and fulfill managerial goals. Evidence shows that engaged employees dramatically improve a company’s bottom-line performance, and that disengaged employees do more damage than one would think (Mosley, 2009, p. 33).
To whom incentives should be addressed? Incentives should be offered to all the employees. According to Mosley (2009, p. 34), this develops a motivational, encouraging and engaging culture, resulting in a better performance throughout the organization. However, special attention should be given to the fact that 80% of the employees are average performers (for whom incentives may have an impact), and that 10% are bottom performers and 10% are top performers (who, in both cases, are indifferent to incentives) (Mosley, 2009, p. 36). See figure 1 below:
Figure 1. Source: Mosley, 2009, pg. 36
What should be given as an incentive? Effective incentives are those that are relevant and personally meaningful to the target employees and do not produce perverse effects for the company. They can be monetary and non-monetary, individual-based and group-based. When deciding what to give as an incentive, human resources managers should be able to answer what motivates the employees to perform a better job, and be aware of the possible unhealthy effects to avoid perverse incentives.
According to Arnolds and Vente (2007, p. 21), research findings suggest that employees who work for firms in which the rewards systems is not aligned to their needs, “perform at the level of what is least expected of them, but will not be motivated to exert the extra effort that makes firms winning enterprises. Such employees will be unhappy, but hooked financially to their firms, while rendering mediocre job performances.”
Even though extensive research has been done regarding the forces that trigger employee´s actions to better perform, applying motivational theories in a pragmatic way, reliably and valuable to corporate management, is a complex task (Badawy, 2007, p. 60). In fact, not only each employee has different motivations, but also organizations have their own strategies and goals, and are affected by their own culture, and the corresponding industry and national cultures (Hofstede G. , 2001, p. 241).
When defining what to give as incentives, human resources managers should take into account that the power of an incentive is related to the way the employees perceive the relationship between efforts, performance and rewards (Badawy, 2007, p. 60). Indeed, employees seek to determine if the rewards satisfy their needs, if they influence their level of effort (which turns into performance) and if by increasing their level of performance they can receive an increase in the rewards.
- Types of incentives
- Monetary vs. non-monetary
Although the most common incentives are monetary, it appears that non-monetary incentives have a more powerful effect. In fact, several studies report that most achievements are reached for non-monetary reasons,  and that although money attracts employees, it does not play a big role in retaining and motivating them (Why money is not a motivator, 2004, as cited by (Arnolds & Vente, 2007, pg. 15).
- Individual-based vs. group-based incentives
From the research performed by Harmon et Al. (Harmon, Barnes, DeRue, Jundt, & Hollenbeck, 2011, pp. 1611, 1615) it can be concluded that both individual-based and group-based incentives have advantages and pitfalls. On one hand, while individual incentives lead to high individual effort and speed (because they link individual effort and individual outcome), they lead to low levels of cooperation and accuracy (because they do not incentivize cooperation with team members), and as a result team performance gets affected. On the other hand, while group incentives lead to cooperation and accuracy (because they align group members´ interests), they lead to social loafing -a “reduction of effort that occurs when individuals work collectively rather than independently”- (because they deteriorate the link between individual effort and individual outcome).
Several researchers have proposed getting the best of individual and group incentives and offsetting their constraints by mixing the two. Harmon et Al. (2011, pp. 1611, 1627) have concluded that in contexts in which accuracy and backing up behavior are of lesser importance than speed and a focus on one’s own taskwork, mixed or individual incentives may be an appropriate method of compensation.
- Perverse incentives
When incentives are not managed strategically, they can induce conflict and consume value (Trevor, 2012, p. 40). Human resources managers should be always aware of the potential perverse effects of the incentives, and choose those that not only produce the desired outcomes but also do not generate unhealthy results.
When should incentives be given?To be effective, incentives should be given as soon as possible after the performance of the behaviour rewarded, and in a consistent and frequent way. According to Panos, (1990), “the closer in time the payout is to the performance, the more reinforcing it will be”. However, it is important to take into account that rewards given, over a long period of time, as an adjunct to a basic compensation program, usually become entitlements, rather than incentives (Gorelick, 2001).
How should incentives be given? Several points should be considered when giving incentives:
- Incentive plans should establish clear and realistic goals and metrics to measure performance. When targets are not clear or are unrealistically high, bonus become unpredictable and people lose interest (Panos, 1990).
- Employees should be ideally involved in planning and executing the incentive plan because this increases motivation (Upton, 2001).
- Incentive plans should be aligned with “the corporate culture and the business strategy” (Verwaeren & Baeten, 2012) and align the incentives to the managerial goals. If the company has an individualistic culture, most probably group incentives will not be powerful (Verwaeren & Baeten, 2012).
- Incentives should reflect performance relative to the industry.
- Incentives should only reward superior performance. They shouldn’t be given for the work expected.
- Incentives should be easily remembered by employees. Upton (2001, p. 27) and Gorelick (2001) have found that money rewards are soon forgotten.
- Managers should choose rewards that are easily remembered by employees, such as groceries vouchers. In fact, while vouchers have the greatest remembrance, cash has a relatively low remembrance (Upton, 2001, p. 27).
- Managers should establish memorable ways to give the incentives, so that employees remember not only the reward given but also the performance expected. A hand-writing letter from the corresponding manager could be an option.
- Effective communication is vital: not only the incentive policy should be clearly communicated to the employees (Simth, 2001, p. 10) -so that they understand what is expected from them- but also they should know how they are performing and what rewards they are getting. Panos (1990) highlights that when employees do not get timely feed-back, not only “there is less opportunity to affect future results”, but also bonus systems become simple benefits programs to which employees are entitled without having to do any extra-effort.
- Managers should clearly communicate the employees (in advance) the performance expected and the scope of the rewards, considering an equal pay for an equal work, as proposed by Fordism (Figart, 2001).
- Managers should permanently up-date employees regarding the way the recognition program is being implemented (rewards given, performance targets expected and performance results delivered).
- Managers should reward employees´ participation in generating new ideas to optimize work, or to increase sales or reduce costs. Ideally they should create a committee to follow up employees´ ideas, so that they feel their ideas are being taken seriously. The ideas implemented by the company should be rewarded.
Special considerations when choosing the rewards pool?
Companies should create a pool of incentives that takes into account employees’ different needs and motivations to perform a better job, the capacity of the Company to fulfill those needs, and avoid incentives that create perverse effects. For example:
- Companies could offer equity compensation to top management. According to Arnolds & Vente (2007) equity compensation seems to be preferred by white-color employees, because they have a more direct influence on company results than blue-color employees individually. Both Webinger and Desai conclude that they help align the interests of managers with the goals of the owners and to reward the former in a way that is commensurate with their performance (Webinger, 2011, pg. 373; Desai, 2012, pg. 116).
- Companies could make emphasis on fringe benefits and social rewards for blue-color employees. Arnold & Vente (2007, pp. 15, 16, 20, 21) found that this employees find that financial incentives have a weaker motivational power in comparison with fringe benefits i.e. paid holidays, sick leaves, paid leaves and housing loans) and social rewards (i.e. showing appreciation for work done). They also found that financial rewards (i.e. year-end bonuses and dividends, wage increases, profit sharing), are stronger motivators than job design rewards (i.e. job security, job rotation, career planning and development, and flexitime), “manipulatable” rewards (such as on-site fitness services, the use of company recreation/convenience facilities for personal project) and consumable rewards (such as coffee break treats, free or subsidised lunches, company picnics, dinners for employees’ families paid for by the firm).
- Companies could offer additional training programs, beneficial for the company (that are not currently performed). As Smith (2001, p. 11) explains, “people want to improve their skills”.
- Companies could offer middle and lower level employees a gain sharing structure instead of a profit sharing structure. In fact, profit sharing has a lower impact on performance than gain sharing, because in the first one employees feel they do not have as much influence over the payout (Panos, 1990).
- For incentives related to performance, companies could:
- Set “a target for minimum company performance below which employees would receive no bonus, an intermediate target at which they´d receive half the bonus amount, a challenging target at which they´d get the full bonus” as Hollanders (See section 2.a above) propose.
- Emphasize on incentives addressed to the average performers.
- Use tight situations as an opportunity to be more creative in the pool of incentives offered to its employees. This would not only reward the employee but may also generate greater sales since his/her family and friends can also use the discount.
- Keep in mind that individual-based rewards should only be given when the desired behaviour is increasing the speed of specific activities, and in those activities accuracy and cooperation are not relevant.
- Keep in mind that group incentives should be given whenever accuracy and cooperation are the desired behaviours.
Incentives seek to reward employees´ behaviours that conduct to an improvement on performance, beyond what would normally be generated. There is no such thing as an ideal incentive plan. In fact, “The most successful incentive program is the one that works well in a particular situation” (Panos, 1990). However, there are certain minimum requirements that should be fulfilled to have an effective incentive policy. In order to establish them, human resources managers should be able to answer why the incentives should be given, to whom they should be addressed, what should be given as an incentive, and when and how they should be distributed.
By, María Carolina Díaz Jiménez
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. For example, according to research studies, while Japanese and American employees seem to find time for personal and family life an important factor at work, Chinese and German employees find it significantly less important (Gunkel, 2006, p. 110).
Upton (2001, p. 27) found that employees prefer rewards that enhance their leisure time instead of money. Barrier (1996), on the other hand, considers that showing appreciation is a stronger motivator of performance than monetary incentives. Baker (2009), on the other hand, points out that people only like two things more than sex and money: recognition and praise.
Arnold & Vente (2007, pp. 15, 16, 20, 21) found that for lower-level employees fringe benefits (i.e. paid holidays, sick leaves, paid leaves and housing loans, in this order) are the strongest motivators. They are followed by social rewards (i.e. showing appreciation for work done), financial rewards (i.e. year-end bonuses and dividends, wage increases, profit sharing), job design rewards (i.e. job security, job rotation, career planning and development, and flexitime), “manipulatable” rewards (such as on-site fitness services, the use of company recreation/convenience facilities for personal project) and consumable rewards (such as coffee break treats, free or subsidised lunches, company picnics, dinners for employees’ families paid for by the firm).
The “rat catchers” from the French Hanoi Colony are a good example of the incentive´s perverse effects. In the spring of 1902, the Municipal Government, worried by the increasing rat population, hired “rat catchers” and paid them by the number of rats killed. Since handing in the entire rat corpse would create a big burden to the Government, it paid for each rat tail brought to the authorities. As soon as the reward program was publicized, the “catchers” began to bring in thousands of tails, but there were frequent sightings of rats without tails in the city streets. In fact, the “catchers” found that merely cutting off the tails and letting the rats go free, would allow them breed and produce more valuable tails. The city ended with millions of more rats than expected before the policy was implemented (CBC-Radio, The Invisible Hand, 2012).
 This is different to give the incentives in a memorable way.
In fact, while profits are affected by market conditions, foreign exchange rates, accounting treatments and other elements that go into determining financial results, gains, are related to output or costs improvements or a combination of both. In regards to cash rewards, different levels of company performance should affect the scope of the incentive.