Designing Incentives and Rewards

In this presentation:

– We’ll examine the underlying concepts that

distinguish effective incentives from ineffective
ones.
– We’ll look at how the goals and performances
of individuals, teams/units/departments, and
organizations might be more effectively linked.

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What Do Incentives Incent
and Rewards Reward?
 Design Issues for Performance-Based
Incentives and Rewards

To be effective, incentive and reward systems must:

• Specify and measure performance.
• Specify the level of aggregation for reward
distribution in the organization’s hierarchy.
• Specify the type of reward.
• Gain employee acceptance.

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 Specify and Measure Performance

1. Employers should measure and reward what is

important:
• Do not ignore performance aspects that are difficult to
measure (e.g., conflict resolution, relationship-
building).
2. Results and behaviors are important:
a. Examples of results:
• Profits, productivity, attendance, quality, sales.
b. Examples of behavior:
• Returns customer calls within 24 hours.
• Checks orders for correct shipping and billing information
before shipping package.
3. Behaviors and results must be under workers’
control.

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 Specify and Measure Performance, cont’d.

4. Decide whether the focus is on short-

term or long-term objectives.
It is a difficult balancing act to ensure that
long-term performance and goals are not
sacrificed for short-term results.
For example:
• Focusing on the short-term stock price for a
company while neglecting crucial long-term
investments in research and development.
• Downsizing to reduce short-term costs while
neglecting long-term skills and knowledge
development.

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 Specify the Level of Aggregation for Reward
Distribution in the Organization’s Hierarchy

Decisions about who to reward and how rewards are

distributed are based on performance at various
levels:
> Individual employee.
> Work teams.
> Department, plant, strategic business unit.
> Organization as a whole.

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Levels of Aggregation for Reward Distribution, cont’d.

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 Specify the Type of Reward

To be effective, the reward:

• Must be valued by employees (not necessarily
financial!).
• Must be clearly linked to expected behaviors or
results.
• For financial rewards, proportion of at-risk pay
generally increases as employees move up the
organization.
• Cultures vary in the acceptability of at-risk pay.

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 Gain Employee Acceptance

1. The plan must be clearly communicated.

2. Employees must believe they are being treated
fairly.
3. The plan must be easily understood and
incentives easy to calculate.
4. Employees should have input into establishing
and administering the plan.
5. When possible, rewards should be given soon
after the desired performance is achieved.

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 Gain Employee Acceptance, cont’d.

• Employees must have an avenue of appeal if they

believe they are treated unfairly.
• Employees must believe they can trust the
organization to be confident that the effort-
performance-reward link will really materialize.

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 Design Challenges for
Performance-Based Team Incentives

• Aligning team performance measures with

individual performance measures.
• Aligning team performance measures with
organizational performance measures.
• Ensuring workload is equitably distributed.
• Coordinating team incentives and incentives for
people not in teams.
• Determining how incentives will be allocated
among core and noncore team members.

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 Advantages of Team Incentives

• Peer pressure reduces counterproductive behavior

(e.g., reduces “social loafing”).
• Group rewards, such as praise and camaraderie,
increase reward value.
• High performers act as role models for marginal
performers.

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 Lessons Learned…

• Individuals vary in what motivates them, so

incentives and rewards must also be varied (one
size does not fit all).
• Organizations frequently reward the very behaviors
and results they are trying to avoid.
• Incentives and rewards must be aligned within and
among individuals, teams/units and the
organization as a whole to be most effective.

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Thank You!

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Resource made available by SHRM US