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Course Number: MGT 421

Instructor authorizing: Dylan Cooper

Extracted from (source citation): Lussier, Robert N. and Hendon, John R. (2019).
Human Resource Management: Functions, Applications, and S kill Development, 3rd Ed..
Los Angeles: Sage.

Source owned by: Broome Library

 445

GUIDELINES FOR CREATING MOTIVATIONAL INCENTIVE SYSTEMS

So we now know that we have a number of factors that make incentive programs more or
less successful. Anytime we are developing a variable pay plan, we have to consider what
we need to do to make it work. W hat will make the system motivational to the workforce
while also improving organization success overall? Exhibit 12-6 lists some guidelines that
researchers have come up with over many years of analyzing incentive programs that can
significantly increase the chances of success. Let’s discuss our guidelines for creation of an
effective incentive plan in a little more detail in this section.

BASED ON ORGANIZATIONAL STRATEGYAND CULTURE. The incentive program must be based

on the goals in the strategic plan— the direction of the organization.78 Think back to when WORK
we discussed strategic H R in Chapter 2. We talked about how H R can drive people to APPLICATION 12-18
do things for the organization that it needs to have done in order to reach its goals. One
Select an organization that
thing we can use to avoid creating the entitlement mentality that we just discussed is to
you know or work for. Do
avoid basing our reinforcem ent on a fixed period of time or a fixed number o f actions
incentives decrease intrinsic
by the employee. We need to base the reward on achieving specific and measurable goals
motivation, or would they if
and provide at least some reinforcement as soon after the goal is achieved as is feasible.
the firm offered them?
If the incentives are not driving our employees to work toward organizational goals,
we w on’t reach those goals. One o f the most common problems in incentive systems is Extrinsic rewards Valued
picking an expedient goal that is easy to measure but doesn’t aim at the strategic goals of returns (such as incentive pay for
the company. performance) to the individual in
exchange for doing something
Another thing that we need to keep in mind is to create both short-term and long-term that the organization desires of the
goals for a ll organization members. Both short- and long-term incentives should be employee
446

provided based on those goals at each level in the firm. This will both mix up the timing
of the rewards provided to the employee and provide them with incentives to improve
company performance over the long term.
We also need to make sure that the incentive program is consistent with the organi­
zational culture.79 A lot of organizational cultures are egalitarian— everyone expects
that they will be compensated equally with others in similar positions. M any others are
collectivist, meaning the group has a strong desire to work together. In an egalitarian cul­
ture, it will be difficult or impossible to provide different rewards to individuals, even if
rewards are based on performance differences. In collectivist cultures, the group won’t
accept incentives that focus on the individual. So culture must be taken into account in
designing incentive systems.80

INCENTIVES FOR ALL. Any incentive program needs to provide performance incentives to all
individuals involved in the process that is being targeted.81 We can’t just provide incentives
to m anagem ent, because m anagem ent will attem pt to force low er-level employees
 447

to perform so that the manager can get rewarded. This is a recipe for frustration and
resistance by the line employees. But w hat if we only provide incentives for the line
workers and not management? M anagem ent’s job (at least a significant part of it) is to
get obstacles out of the way so that line employees can do their jobs. If the manager has no
incentive to move quickly to get obstacles out of the way, we just end up with frustrated
employees who can’t meet their incentive goals.
Can the incentive apply differentially? Yes, if one group’s job is more important to
reaching the goal, then it is OK to give them a differential incentive. However, everyone
needs to be rewarded so that they have an incentive to work together.

UNDERSTANDABLE AND CLEARLY COMMUNICATED. C o m p lex ity is a p a rt o f m any

organizational environments in today’s businesses. However, our incentive programs
have to be set up in such a way that employees at every level of the firm can understand
them. If people can’t understand what is expected of them, there is no way that they will
reach the goals that we set. In addition, even if the program is understandable, it has to be
accurately communicated to everyone in the organization.82 All of our employees need to
know about the program: how to participate, what their goals are, any assistance that is
available to help them meet those goals, how their performance ties in with that of others
in the company, and any other pertinent information. Good incentive programs must be
clearly and completely communicated to all the personnel affected by the program.83

BASED ON FACTORS THE TARGET CAN AFFECT. The incentive offered should be based on
factors that the individual or group, whichever is the target of the incentive, can affect.84
If it is an individual incentive, the individual employee should be able to modify their
behavior to affect the outcome of the process, and the same goes for a group of employees.
If the individual or group can see no connection between what they do and reaching the
goal, they will most likely do nothing different than before the incentive was instituted.

SMART GOALS. Rem em ber in C hapter 8 where we talked about goals having to be
SM A R T— specific, m easurable, attainable, relevant, and time based? SM A R T goals
provide a clear link between performance and payout.85 Here again, as with any valuable
organizational goal, we have to ensure that our incentive program identifies the goals of
the plan in SM A R T fashion. This is the only way that we can then accurately measure
and reward our employees for goal attainment. So remember to use our setting objectives
model: To + action verb + specific and measurable outcome + target date.

CLEARLY SEPARATE FROM BASE PAY. Base pay is almost always considered an entitlement
by the employees in an organization. We utilize base pay to allow our workforce to meet
their basic needs (M aslow ’s physiological, safety, and social needs). This base pay very
rarely motivates additional actions on the part of our employees. Incentives need to be
clearly separated from base pay to avoid creating the impression that they, too, are an
entitlement. Employees need to understand that they only receive incentive rewards if they
do something extraordinary.

A SIGNIFICANT PIECE OF OVERALL COMPENSATION. W h at is a “sig n ifican t p iece” of

com pensation? C om pensation studies will tell you different things about w hat is
considered significant.86 A good recommendation would be at least 10 % of overall pay
and, in some cases, 2 0 % or more. Why? Let’s take a look at an example.
You work for X Y Z Co. and are getting paid $4 0 ,0 0 0 a year. Your manager decides to
give you a 2 % bonus if you reach your goals this year, or $800. You reach your incentive
goals at the end of the year, and it is now time to pay you. If we pay you a lump sum at the
end of the year, we generally have to take out 2 5 % for federal withholding taxes and may
have to take out state tax as well, so your $800 just dropped to between $5 0 0 and $600.
At a salary of $ 4 0 ,0 0 0 per year, if you are paid twice m onthly, you would normally
receive about $ 1 ,3 5 0 or so per paycheck, depending on the state in which you reside.
448

How many of you would work really hard next year if you got a whopping $ 5 00, a little
more than one third of 1 month’s pay, as a bonus for meeting your goals the year before?
To most of us, that would be an insignificant reward for meeting our goals for an entire
year. Remember what we said when discussing merit pay earlier in the chapter: Merit pay
is typically a very small percentage of the individual’s total pay, which makes using it as a
motivator for performance very difficult.
Alternatively, if we make your base pay $ 3 6 ,0 0 0 and provide a 10 % incentive for
reaching certain goals, you will receive around $ 2 ,6 0 0 after taxes— a sum that most peo­
ple making $ 3 6 ,0 0 0 per year would consider significant. People need to feel that the
reward is “significant” to them in order for it to motivate them.

TAKE GREAT CARE IN ADMINISTERING THE PROGRAM. Meticulously measure performance

using multiple metrics and vigilantly calculate the rewards to be provided to persons
who reach their incentive g o a ls.87 If the com pany owes an individual or group an
incentive award based on reaching their goals, then we must make sure that it is paid. Set
attainable standards and then measure them fairly, when and how they are supposed to
be measured. Once performance is measured, reward those who attain the goals as soon
as possible. If individuals or groups did not meet their goals, communicate that to them so
that they know why they didn’t get a reward.
Again, an example helps in understanding what might happen if we fail to be meticu­
lous in our measuring and administration duties. Let’s say we have 600 employees in our
company and set some ambitious goals at the beginning of the year for the company and
for each individual employee. As a company, we met our goals for the year, and we calcu­
lated whether or not each individual employee met their personal goals. But we miscalcu­
lated with one person. How fast will the word likely get around the company that we
“cheated” that one employee? Via the employee grapevine, it will probably be known
throughout the company in 2 days— possibly 1. This employee starts telling their friends
that “the company cheated me and lied to me.” And what will happen as soon as one per­
son starts to complain? As soon as one person makes that claim, others will start to won­
der whether or not they were treated fairly— even thou g h w e w ere co rrect in calculating
their individual p ay m en ts! Pretty soon, what was supposed to be a motivational program
becomes a massive demotivator due to the fact that people begin to perceiv e that they may
not have been treated fairly. We have to be meticulous in our management of any incen­
tive program.

PR0MPTLY APPLY ANY INCENTIVE AWARD. “Keep the time between the performance and
reward as short as possible.”88 If the incentive is based on an annual goal, and we use a
calendar year as our organizational fiscal year, our year ends in December, and we should
provide any incentive awards on the first payday in January, or even on December 31 if
we already have results calculated. If incentives are calculated monthly, pay them at the
end of the month. Why? We provide the reward to rein fo rce the employee’s efforts that
led to desired results. If you receive a reward 6 months after you do something, you don’t
really see the connection. If you don’t see the connection, it does not reinforce your earlier
actions.

DON’TFORGET NONMONETARY REWARDS. Remember from our discussion about praise and
other nonmonetary recognition that not everyone is motivated by cash.89 Nonmonetary
rewards often work better than monetary rewards. Having a bit of time off to play with
the company’s resources, like 3M Company provides, can be a huge incentive. 3M gives
15% of work time to employees to use the company’s resources and labs and to just tinker
around and see what they can come up with.90 Post-it notes were created in just this way
in 1974. A 3M employee was tired of bookmarks falling out of his books, so he used an
adhesive that had been invented at 3M earlier (but considered a failure) and applied it to
small pieces of paper. The incentive was in being a llo w ed to be creative and avoid being
bored. Incentives can include providing the ability to choose between work assignments,
 449

providing training and learning opportunities, allowing flexible schedules, providing

extra paid time off, recognition at an awards ceremony, offers to present results to top
management, having greater input into future incentive goals, and many others. We can
use an on-site child care center or a gym or lounge as an incentive— for example, “If we
reach a certain set of organizational goals by the end of the year, we will be able to build
the child care center.” To many people in today’s workforce, this would be a significant
incentive. However, to others, it may not be a reward at all. Remember that according to
expectancy theory, we have to pay attention to significance.

DON’T REWARD NONPERFORMERS. When goals are not met, do not apply rewards.91 It seems
silly to have to say this, but in many cases, you will w ant to reward your employees, even
when they don’t quite meet the goals that were set. Why would this happen? Let’s look at
an example that will explain it.
Andy works for you and didn’t quite meet the goals set for the incentive program at
the end of the year. You are a good manager, and you saw Andy consistently come to
work and work hard, but he just wasn’t able to reach his goal. At the end of the year, you
see that he didn’t make it, but you know that Andy is a hard worker. So you sit down and
look at everyone in your department, and everyone except Andy met their goals. Then you
think about how hard Andy tries and you say, “I know I saw him working all the time.
I am just going to give the incentive payment to him anyway because I know that he works
hard.” Here again, how quickly will the word get around about Andy getting the reward
even though he didn’t meet his goals? Again, the com m unication grapevine will start
working, and within 1 or 2 days everyone will know, because Andy is going to tell them.
Well, what will happen next time incentives are being calculated? N ext time, maybe
several workers miss their goals, and they tell you, “Boss, I worked my tail off, but I just W O RK
couldn’t reach my goals. But you gave Andy his incentive last time even though he missed APPLICATION 12-13
his goal. You can go ahead and give it to me too, right?” You have succeeded in destroying
Select an organization that you
your incentive program because you rewarded a nonperformer. Rewarding nonperform­
know or work for. In which two
ers just cannot be allowed if we want the incentive program to continue to work in the
or three incentive pay guidelines
future.
is your organization strongest and
There is, however, a way that we may be able to reward Andy, at least partially, but weakest at following to ensure it
we have to identify it at the beginning of the program. We can create a series of progres­ effectively motivates employees?
sively more difficult goals in our incentive program. This allows us to provide a minimal
incentive for meeting goals that are just above a baseline and provide progressively more
significant awards for meeting more difficult goals. This will let us reward Andy for going
above the standard but not quite meeting an aggressive incentive goal. So progressive or
stair-step goals can help us avoid rewarding people who don’t meet the top-level, or most
difficult, goals.

MAKE THE INCENTIVE PROGRAM PART OF A COMPREHENSIVE APPROACH TO MANAGING.

Remember that incentives can create a “just do what you get paid fo r” mentality. So,
as we noted earlier in this chapter, we “make the incentive specific but make overall
job perform ance a part o f any variable pay p rogram .” We ca n ’t create an incentive
for every aspect of every job in most organizations, so we have to continue to evaluate
and reward overall performance so that our employees know that they have to do all
tasks successfully, even though only some have incentives directly attached to their
performance. One easy way to do this is to provide a caveat in the incentive program that
receipt of an overall performance appraisal of “Meets Expectations” or higher is required
in order to be eligible for incentive rewards.