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McAdams, J. (2000).

The essential role of rewarding teams and
teamwork : 15 . Compensation and Benefits Management, 16 (4)
The Essential Role ofRewarding Teams
and Teamwork
• • ••••••••••••••••• o o •••• o o o ••• 0 0 o o. o •••• o ••• o •••••••••• o o •• ••• o •• o o • ••••••• • o •• o ••• • •••••••••••••••••••• •
mployee incentive pla.ns are so common in North America that they risk becoming pmverless.
lt i.s possible to structU're effective plans, hO'llJever, and avoid undesirable results. Among
plan design options are incentive plans that recognize everyone in the organization and
tlwse that zero in on special project teams. As always, good implernentation of the plan
design will get the company what it wants.
grips wíth the ·realization that she hasn 't paid enough
attention to her human capital, her employees. As a
vice-presi.dent of operations, she manages physical
c   p i t   ~ the labs and production, and economic capital
through the budgeting and expenditures process. Be-
cause she's been adept on both fronts, operations is
exceeding budgeted perfonnance plan.
Yet she knows something is amiss.
Jerry McAdams is a thought-leader for Strategic Rewards for
Watson Wyatt Worldwide and co-founder of lhe Consortium
for Alternaúve Reward Stl'ategies Research (CARS). He is a
member of the facuhy ofWorldatWork. (formerly American
Compensation Association) and is a regular speaker at
human resources conferences.
This article is based en the book Rewarding Teoms, L«sstms Jrom lht
Tre11ches, by Glenn Parker, je!T)' McAdams, and David Zielinski.
Copyright 2000.jossey-Bass, lnc., Publishers, San Francisco.
Susan has left the 1nanagement-and leadership
- of more than 1, 000 people largely to company poli-
cíes and admini,stration processes, prünarily the do-
tnain of Hwnan Resources. But reperwssions Jrorn the
CONPRO team project- the team 's feeling that 1nan-
agement could have played a more visible and hands-
on role in championing and rewarding teamwork-
have her closely examining her 1nanagement style.
Susan is scheduled for her weekly one-on-one
lunch with a trusted peer, General Manager jeny
Parker. They have warlud together for m.ore than 1 O
years, and the relationship is comfortable. The two
regularly bounce ideas off each other and explore ways
of meeting their respective business goals.
After ordering lunch in the executive dining
room, Susan asks, "Do you remember the CONPRO
team?" "Su·re, "]erry responds. "! think it 's one of our
real success stories. At least, corporate thinks it is. l
agree that they should be nominated for the Chainnan 's
"! thought it was pretty successful in the end, but
it sure took a while to get there, "she says. "Anyway, we
had a feedback session, and 1 was surprised about hO'llJ
negative some of the comments were about how the ar-
ganiz.ation 1nanages teams. "

A U TUMN 2000
jerry was surprised. "How can that be? The em-
ployee apinion su-ruey we just did shows we're doing
pretty good and peaple think this is a good enviromnent
to work in. We gave Rupert ... ahhh, what 's-his-
name? . .. Collins that employee of tite year awltrd.
Benefits are competitive and so is compensation. 1 talk
about teamwork all the time. " He paused to sip his
chiUed white wine.
'1 know, " says Susan, "but if some of rntr best
peaple tell us that we talk teamwork, but don 't live it,
that extra effort is rewar·ded only with the opportunity
to pul out even more effort fur no extra pay, that we
wflTk in silos, and that all the meaningful rewards are
·reseroed jflT managernent, we've got a problem. We t.alk
a good garne about the irnportance of peaple, but !'m
starting to think we m.ay be creating a pleasing work
environrnent, but not a place where perj(JT7nance is
adequately recognized ur rewarded. Especially team per-
"O K, if you think it s a probl.em, then it probably
is, "j eny says. "vVhere do we sta·rt?"
"That's arwther problem. 1 need a ro(td map. l
guess 1 start by looking at where we 've been and where
we are nuw. 1 went to a va-riable compensation. meeting
in New York l.ast year and got so1ne material on reward
systems Jor wurk tearns. I'll try to find it. "
etting all employees engaged in pursuil of
organizational goals-as individuals, as
part of small work teams, or as broader
organizational units-requires action and consis-
tent follow-through by the management team.
Unfonunately, management interventions that
can spur such engagement-such as reward
plans, communication devices, or training pro-
grams-are often created and implemented not
as a coordinated system, but independent of one
another. Even when they are pan of a coordi-
nated plan, they're often designed at cross-pur-
poses. It's not at all unusual for companies to
trai n people how to work as high-performing
teams, and then publicly celebrate or reward
only the work of outstanding individuals. Two
practices percei.ved by employees as sending con-
trary messages.
Reward and recognition systems, communi-
cation and performance feedback devices, and
training tools must be aligned along the same
path, with the left hand in full understanding of
what tl1e right is up to, and with the same end
goal. The alignment of purpose stans with vision
and mission and is put into operation through
work systems, communications, management
coaching, personal/ professional development,
performance measurement-and, of course, re-
ward systems.
Improving where you're headed first re-
quires understanding where you currently stand.
We'd argue, for instance, that the balance of or-
ganizations with more than a few hundred em-
ployees would be hard pressed to answer most of
the following questions:
Reward Systems
• ls there an inventory or audit of all reinforce-
ment plans (social, celebrations, cash, non-
cash, etc.) presently operating at any level of
the organization?
• What corporate objectives are supponed by
each reward or recognition plan, and how do
we know if they've been successful?
• Are the reward systems consistem with the
organiZt'ltional culture and management
• How well do people understand how each
plan works-or how aware are thcy that the
plans exist?
• Who is eligible for each plan, and how many
actually receive awards?
• How much is spent on each plan and what is
the average (or median if there is a wide
range) award earnings per person?
• What is the value-contribution from the plans
(performance improvement, reinforcing the
mission and vision statements, tcamwork,
customer success, maintaining or improving
the organization's competitive position in the
labor market, etc.)?
Communicatlons and Performance
• How often are company or organizational
unit measures and performance objectives
communicated-and explained-to all em-
• How often are employees told about the or-
ganization 's successes, failures, and competi-
Lion in the marketplace?
T H E E S S E N T 1 A L R O LE O F R E W A R O 1 N G T E A M S A N O T E A M W O R K 17
• How often are employees asked- and more
importantly, listened to-about their ideas
for improving company or business unit per-
As you move toward a team-based culture,
strategies, and practices under these categories
will need to be maintained, redesigned, or tossed
altogether to match the new direction. But con-
ducting such a systems alignment audit is critica!
before installing a team-based rev.rard or recogni-
tion system; doing the latter in isolation will
greatly limit its impact. The objective is to create
an integrated portfolio of practices that "lever-
ages" or makes maximum use of human capital
to improve business performance.
Susan's experience with "leveraging" human capital
has not heen hugely successful (J'()er the long run. Man-
agement has been sending out directives, and estahlish-
ing many measu·res of StlCcess ( usually financial) since
she's heen there. Management By Objectives (MBO)
was all the rage fo-r a while, but quickly showed itseif as
mo-re of a planning/paperwoik exercise than a way to
engage, excite, and align all employees toward a com-
mon purpose. MBO is now a part of most everyone's
job, but Susan isn't convinced it makes a great deal of
difference in pef1Jle's o-r the organization's peifrmnance.
The real problmn is creating accountability at
m.anagerial and supervisqry fevels Jo-r suppo-rting and
rewarding teamwork in the ranks. Perfrmnance ?nan-
agement is a mixed bag. 1he o-rganization has in-
creased its Jocus on devel()/Jing competencies and has
encouraged managers to ?n(J'()e peopl.e around, hoping
the new oppo-rtunities will increase thei:r sense of satis-
factiO'n and develop 11UJ1'e diverse skills in the wo-rkfo-rce.
The m.erit pay plan, however, still dist'Tilmtes only a
palt·ry 3 to 5 percent ayear to the balance of employees,
barely keeping pace with injlation. A handful of "out-
standing" peifqnners get 8 to 1 O pe1·cent. Employees
believe salary increases are a "-right" they 're entitled to.
There are fezv, if any, incentive plans tied to o-rganiza-
tional unit or project team peifrmnance, and still fewer
recognitiO'n tools used to celebrate teamwO'Tk in the o-r-
As the o-rganizatiO'n was preparing its application
for the Malcohn Baldrige National Quality Award,
continuous improve1nent project teams sprouted up
everywhere. But most of the process impr(J'()enwnts those
teams suggested have been successjuUy integrated into
the departments'·d way of doing business, and
tite "team" activity has dwindü:d away.
RecognitiO'n focuses on an "employee of the
month" and then "of the year. " Their immediate super-
visqrs o-r managers nominate employees, and final se-
lection is by a top 1nanage1nent committee. There is little
peer-based recognition. Lately, it seems as if Susan has
to beg to get nominatillns every month. The quality of
the nominations is dropping -rapidly.
Any project tean!S, stLCh as CONPRO, are consid-
ered "rewarded" simply if they present results to top
management. Tite cookout was appreciated, but the T-
shirts were misunderstood as representing the true value
of their contributinns. Probably a mistake to pass those
out when she did.
A few years ago, Susan created a gain-sha:ring fo-r production. It was based on a cmnpl.ex far-
mula measuring redttctiO'n of labO'r costs per ttnit of
prodtLCtion against a standard. Engineering got tied
up redefining standards and in the difficult practice of
m.easuring peifonnance against goals, and the plan
simply lost mmnentum. Payouts shrank, and the plan
was terminated not long after introdttction.
But Susan figured it was time to take up the re-
ward and recognition issue a.gain. Well-designed team-
based rewards have a unifying effect and offer an op-
pmtunity to create aligntnent and accountability, along
with spurring perfrmnance impr(J'()ement and collaho-ra-
tive behaviors. She knows rewards alone won 't solve the
proble?n, but they will get pe()/Jle's attention and give
teams a sense that the fmits of their labo-r aren't going
only into the o-rganization 's coffers.
Then she fO'Und the presentatiO'n from the vari-
able compensatüm woikshop. It descrihed a Reinfo-rce-
ment Model Jor choosing and using various ·reward
and recognition strategies.
he Reinforcement Model is an easy way to
look at your reward plan options. It begins
with the organization's objectives and de-
sired culture.
Business objectives tend to be straightfor-
ward. Profit, revenue growth, cycle time, EVA,
financia! retum calculations, customer satisfac-
tion, quality, new product development, and op-
erating expense reduction are typical. Reward
plans must be aligned with these objectives to
ensure management support. "Nice todo" objec-
tives are not as effective as "key to our success"
ones. Sorne objectives translate nicely into meas-

A UTU MN 2000
u res against which performance can be judged.
Sorne require drilling down to find those activi-
ties, projects, and relevant contributory measures
that, when addressed, will affect performance.
Susan ticked off tite organization 's primary business
• Growth
• Cycle time
• Retaining the workforce
• Retum on net assets
• Customer satisfaction/loyalty/success
While the Ust could contain up to 20 additümal objec-
tives, all of them important at di.fferent levels of the
organization, she understood that. people couldn 't focus
on more titan 3 to 5 objectives. If she had to put her
hu1nan capital to work on just a few objectives, these
would be the critical ones.
The best physical exercise plans are those
that you will do. The same is true with reward
plans. The best ones are those that the organiza-
úon will embrace as important to meet its needs.
That means all levels of management accepúng
the plans as business strategies to engage its em-
ployees in addressing its objectives. And that is a
matter of culture. Organizaúonal culture (and
how to influence it) has been the subject of
many a book and academic research. The or-
ganization's vision, mission, history, operating
norms, strategy, environment, and structure
form culture. For the purpose of discussing re-
ward plans, culture can be described as how the
organizaúon uúlizes its employees to get work
done. It is more than work design. lt is the way
people are considered when there is a desire to
improve performance.
One general description of the whole or-
ganizaúon 's culture is possible, although organi-
zaúons are rnade up of a number of sub-
organizational units, each with a slightly di.ffer-
ent culture. Accounúng has a different culture
than Marketing. Manufacturing has a different
culture than Custorner Service. Hopefully, they
are aligned with the overreaching organizaúonal
culture, with the differences simply reflecting the
nature of the work they do.
One of the keys to success in irnproving or-
ganizational performance is to ensure that re-
ward plans reinforce the desired culture, or at
least attempt to reduce the gap between the ex-
isúng and desired culture.
Exhibit l. Continuum of Organization Culture and lmprovement Approaches
Organizational Culture: How Work Gets Done
Task and Job- Individually Focused Hierarchical, Traditional   .........._
Based (example: - and Mea.sured - (example: directive, top - ..........
. .
. ) (example. sales) down) (example. open-
ClV1 servJce book, fluid

Task and Job
Organizational Perfonnance lmprovement Approaches
• •
lmprove Individual
Direction and
Engagement in
Exhibit 1 is a way to describe organizationaJ
culture. It ranges from a focus on individual
tasks and jobs to a collaborative and cross-func-
tional tearn-based organization. The culture de-
termines what has to be done to improve
What part of the continnuum should you
target? Simply put, the desired culture should be
the one that best suits the needs of your busi-
ness. lf your desired culture differs from your
existing one, it's important to structure any new
reward or recognition system to reinforce the
ideal culture, the one you're moving toward. For
exarnple, if your most influential reward plan is
to recognize and celebrate outstanding perform-
ers and you want a culture of collaborative
teamwork, you 've got a misalignment. An organ-
izational unit incentive plan that rewards results
through teamwork would be more appropriate
and should be added to your existing plans. Re-
ward systems need to be aligned with the desired
Susan believes her present culture is hierarchical and
somewhat paternalistic. The nice offices, day care cen-
ter, employee gym, and excellent cafeteria a-re imp()rtant
Jw attmcting and retaining employees, but they're
strictly envir()nmental benefits, almost table stakes fw
staying in the recruitment/retentÍ()n game these days.
The prevailing management style of cmnmand
and C()ntrol stems Jrom a time when cost C()ntrol was
paramount. But now revenue gmwth and rapid prod-
uct innovati()n are the new totems. Managem.cnt re-
spects and values employees, but old traditi()nS die
hard, and the company stiU largel:y manages and vi.ews
pe()jJle- headcount- as a "cost of doing business, "
not as a cmnpetitive advantage.
She believes ?TL()Ving to a team-based, coll.abwative
cultuTe would be the best fit fw the wganizati()n 's new
strategic th-rust. She needs employees to be foctlSed on
Exhibit 2. Cost of Plans and Participant Focus
what's best Jor tite business and somehow, also make
that the best Jw them. Equally imporlant is engaging
management in supp()rt of this new culture.
eward and recognition plans run the
garnut in organizations. Sorne plans are
designed to create a focus on specific ob-
jectives or celebrate outstanding individuals or
teams-these are commonly called recognitiorl
plans. Sorne plans are speci:fically designed to
improve organizational performance through
the work of defined work groups or teams-
these are ()rganizati()nal unit incentives and project
team incentives.
The key is knowing when to use plans as
"standalones," and when to use them in suppon
of each other to increase their power and effect
on business objectives. Objectives overlap plans,
and plans often overlap each other. The role of
the reinforcement model is to provide a frame-
work for choosing the best combination of re-
ward or recognition plans.
Exhibit 2 begins with a look at how the cost
of plans (payouts) is viewed by management and
the participant focus. This continuum relates
how the cost of the reward plans correlate with
the plan's intended participant focus. GeneraJly
plans that focus on the individual are considered
a cost of doing business. Base salary and benefit.s
make up most of the cost of people in organiza-
tions. These are table stakes. They provide the
organization with little opponunity for leverag-
ing business results. Moving to the right, plans
that focus on project teams and organizationaJ
unit performance payout with the performance
Cost of Dolng Business .... .... -
Cost (payouts) lnvestment in Results
Participan/: Focus


of those teams or units. If the results are not
there, the payouts aren't either. The cost of
these plans are often offset or funded by the im-
provement itself oran investment in meeting or
exceeding objectives that add value to the or-
xhibit 3 combines the cost, participant fo-
cus, and type of plans as an overview of the
Reinforcement Model. Base compensation
and benefit, competency, and individual incen-
tive plans have critical rol es in an organization,
but it is the last three (recognition, project team
incentive, and organizational unit incentive
plans) that reinforce and reward teamwork.
These three of the six types of reward plans will
be discussed.
Recognition Plans
Recognition plans are investments in human
capital and often reflect the culture of an or-
ganization. These plans can apply to individuals,
project teams, or permanent work groups (or-
ganizational units, by our definition). Recogni-
tion can take the form of a simpl e "thank you" to
a cash spot bonus toa trip to Bali. (See Exhibit 4.)
Exhibit 3. The Reinforcement Model
Cost of Doing Business  
Cost (payouts)
Participant Focus

Base Capability Individual
Compensation (Competency) Incentives
& Benefits
The critica! distinction between recognition
and incentive plans is certainty. Recognition is
after the fact, that is, awarded after behavior is
exhibited or results accomplished; it is not "do
this and get that" according to a pre-announced
schedule, but "we saw you do this-thanks." Rec-
ognition plans do not guarantee awards.
There are as many variations of recognition
plans as there are crcative minds. What we know
is that they are very powerful, and generally un-
derutili zed, tools for encouraging repeat positive
performance and building team morale. Getting
the most out of recognition plans requires ongo-
ing attention and regular refreshing to stay
meaningful to employees.
Recognition plans can be categorized as:
• Celebrating arganizational objectives. Picnics,
pizza parties, special lunches, regular meet-
ings to share accomplishments and chal-
lenges, and information trading sessions are
all examples of recognizing both the objec-
tives of the organization and the importance
of people in meeting those objectives. They
are inexpensive, fun, signilicant, and make a
positive cultural statement. They must be
frequem, open, honest, and involving. They
are about focus and celebration, rather than
manipulation and hype.
... Investment in Results
Project O!:,ganizationa ..
Team Unit
- -
.. ...
Recognition Project Organizational
Team Unit Incentives
T H E E S S E N T I A L R O L E O F R E W A R D 1 N G T E A M S A N D T E A M W O R K 21
Exbibit 4. Recognition
/ /
· ..
Pro jec:t Team
... Pro.iect Ül'l!.anizational ..
..... Individual .... Organlzational Unit
Team Unit
_L _...J_ _L _j_ _L __¡_
Base Compensadoo ca.-bllitles In di vi dual
aod Benena Dt"'lop lndlvlwal  
Nrracr atuf skUI$ and l mprove individual
• Basepay competmde performtJJfce
• Adjus1men1s lo base • Technical & Career • Sales incentive or
pll)l Tmcks convnission pbns
• Benefiu • Competency -Based • Piecc>rnle
• Annual Bonuses Performance • MBO-based
Man.,enl inc<nl ives
• Reinfarcing outstanding performers, as individu-
als, teams, ar arganízatiunal units. This is a
fonnalized process of spot awa.rds. They can
be given at management's djscretion,
L.hrough a nomination process with a com-
mittee deciding who will be rewa.rded, or
from fellow employees or customers. They
single out contributors or teams of contribu-
tors to say "thanks" and "well done." They
can be done in private (as opposed to secret)
or in public. The awards can be cash, mer-
chandise, special assignments, L.he opponu-
nity to leam and develop, promotions, or a
honest expression of "than.k you." They can
be time-based (monthly awa.rds) or based on
events (an accomplishment or contribution).
• Reinj&rcing desired behaviars ar activities. These
are generally social recogrution of the com-
pletion of a training courses, special proj ects,
or even changed behavior.
• Seroice. Recognizing years of service toan or-
ganization is L.he most common of plans, so
common that it is rarely mentioned when
• Organizational
success, miss ion, and
visK>n celebrations
• Spot bonuses,
discretK>n, nomination,
or peer-to-peer
listing the active plans. lt has become an en-
titl ement but does carry L.he message, "we
know you are staying with us and we are tak-
ing the time to celebrate it." The traditional
pin or plaque is being replaced with a selec-
tion of items allowing the employee to
choose something more meaningful and use-
The number and visibility of recognition
plans says a lot about an organization's culture.
The more dynamic and meaningful the plans,
the more appreciated the employees feel.
Susan decides to m.ake a fundamental change in her
two existing recognitiO'n plans, Emplnyee of the Month
and Chainnan :r Award. (Whether the chainnan will
agree is another issue.) She changes the EoM award to
a spot bonus plan that allO'ws any supervisar ar 1nan-
ager to award or teams up to $500 in cash
ar merchandise Jrom a with no approval. For
spot awards between $500 and $5,000, one-step up
1nanagement approval is required, and awards above

$5,000 require tite CEO's approval. These rewards can
be given (tnytime, but only for work that contributes lo
a team's primaty objeclives or demonstrates desired
team behaviors. HOlllever, the awards aren't only at
management discretion- non-management employees
can nominate peers or other teams Jor awards through
their own managers.
She appoints a crossfunctional, cross-level team
of eight to promote and monitor the plan. At the end of
each six-trwnth period, two rnembers rotate off and two
otlurr employees come on. When people rotate off, Susan
recognizes them for their contributions with lelters of
thanks or olher symholic, non-cash awards.
Project Team Incentives
Project teams are usually, but not always, formed
by management to tackle specific projects or
challenges   a defined time frame-revicMng
processes for efficiency or cost-savings recom-
mcndations, launching a new software product,
or implementing enterprise resource planning
systems are just a few examples. In other cases,
teams self·form around specific issues, or as part
of continuous improvement initiatives such as
E.xhibit 5. Project Incentives
team-based suggestion systems. (See Exhibit 5.)
Project teams can have cross-functional
membership or simply be a subset of an ex.isting
organizational unit. The person who sponsors
the team-its champion-typically crcates an in-
centive plan Mth specific objective measures and
an award schedule tied to achieving those meas-
ures. To qualify as an incentive, the plan must
included pre-announced goals, Mth a "do this,
get that" guarantce for teams. The incentive
usually va1ies Mth the value added by the pro-
ject. Project team incentive plans usually have
sorne combinat.ion of these basic measures:
• Project milestones. Hit a milestone, on budget
and on time, and all team members eam a
defined amount. Allhough sound in theory,
there are inherent problems in tying finan-
cia! incentives to milestones. Mile-
stones often change for good reason
(technological advances, market shifts, other
developments, etc.), and you don't want the
team a.nd management to get into a negoúa.-
tion on "slipping" dates to trigger the incen-
tive. Unless milestones are seL in stone
Project Project

..... Individual Organizational
_L _j_
Base Capabilities Individual Recognlllon
Project Incentives
Compensallon Develop Individua 1 lncenlives Celebra te
Measure and reward
and Benerats sk:ills a nd lmprove individual ou/Sianding
Altract and retain competencies perfonnonce perfonnance project results
• Base pay • Technical & • Sales incentive • Organizaúonal
• Management-

Adjustments to Career Tracks or oommission success,
fonned team
base pay • Competency- plans mission/vision
• Benclits Bnsed • Piece-rate celebrations
• Annual Bonuses Peñonnance • MBQ-based • Spot txmuses,
• Self-formed
Management incenúves management
employee teams
no mi nation or
T H E E S S E N T 1 A L R O L E O F R E W A R D 1 G T E A M S A N D T E A M W O R K 23
and reaching them is simply a funcúon ofthe
team doing its normal, everyday job, it's gen-
erally best to use recognition-an after-the-
fact celebration of reaching mileswnes-
rather than tying financia! incentives to their
achievemem. Milestones need not always be
time-based. When the team hits Lhe mile-
stone, they earn. The sooner they hit it, the
sooner they get the award.
• Projecl completion. AJI team mero bers eam a
defined amount when they complete the pro-
ject, on budget and on time (orto the team
champion's quality standards).
• Value added. This award is a function of the
value added by a project and depends largely
on the ability of the organization to create
and/ or track objective meas u res. Examples
include reduced tumaround time on cus-
tomer requests, improved cycle times for
product development, cost savings due to
new process efficiencies, or incremental
profit or market share created by the product
or service developed/ impl emented by the
project team.
One warning about project incentive plans:
They can be very effective in helping teams stay
focused, accomplish goals, and feel like there's
sorne reward for Lheir hard work, but they tend
to be exclusionary. Not everyone can be on a
project team. Sorne employees (team members)
will have an opponunity to eam an incentive
that others (non-team members) do not. There
is a lack of internal equity. One way to address
the issue is to reward core team members with
incentives for reaching team goals and also rec-
ognize peripheral players who supported the
team, either by offering advice, resources or a
pair of hands, or by covering for project team
members back at their regular jobs. Sorne pro-
jects are of such strategic importance that you
can live with these imernal equity problems and
non-team members' grousing about exclusionary
incentives. The bottom line, though, is that this
too! should be used cautiously.
One type of project incentive plan can help
sidestep perceived equity problems, however-
incentives for self-formed tearns. Under this plan
employees are encouraged to form Lheir own
teams-usually between five and eight people-
take on a speci.fic objective and emerge with a
way to make things better. Team-based sugges-
úon systems are one manifestation of this plan,
with cost reduction as a common target.
In well-designed plans, teams have the re-
sponsibility not only of coming up with an idea
or solution, but of writing up a business and im-
plementation plan, getting managers affected by
the change to sign off on it, developing the cost-
justification (savings or degree of performance
improvement), submitting it to managemem for
approvaJ, and then taking an active role in idea
implementation. Again, a pre-announced reward
schedule-do this, get that, usually based on
cost reduction-is used for al! such incentive
plans. Special consideraúon is given to projects
for which cost reduction is not an appropriate
Susan realized a good project team incentive would
have made al! the difference to the CONPRO team. It
wouldn 't have eliminated the usual difficullies most
teams face in melding different styles and approaches to
accomplish project goal.s, but it would have made team
members feel more appreciated and would have forced
]udy and other team rnembers to agree on more quanti-
fiable project outcomes as the basis of tite financia/ in-
She decides to layout guidelines for ful'ure project
incentive plans. The guidelines includ.e a payout range
(20 percenl of base pay maximmn per team member for
hitting pre-announced goals, 5 percent minimum),
time limit (no projects longer than 12 months), project
goals (mustfocus on company business objectives), and
participation ( equal payotlt for all assigned core team
members, with the exceptt:on of lhe team leader who
earns one and a halj times the individual team member
amount). The team can be composed of either fullrtime
or part-time members, but nota mix. (A team cannot be
made up of three people wlw only spend 1 O percent of
their time on the team, and seven who spend 100 per-
cenl.) Champions are given guidelines for devel.oping
incentive plans, and Susan must approve any plan.
Project team incentives are to be used jttdiciously and
every effort should be made to link the team 's work lo
one of the company's strategic objectives. She also de-
cides the plans will cmly apply to managementformed,
crossfunctional project teams.
Organizational Unit Incentives
Organizational unit incentive plans cover a de-
fined population, usually an organizaúonal unit
- an entire company, a division, a department, a

workgroup. The unit appears on an organiza-
tional chart. Panicipation may be limited to cer-
tain levels of employees in that organizaúonal
unit (everyone, all non-exempt people, all ex-
empt, or everyone but those on the management
incentive plan). The performance-award sched-
ule is pre-announced. Panicipants know how
much they can eam as a function of perform-
ance against the measures. lt focuses on the pri-
mary business objectives and can use perfor-
mance measures most appropriate for the
panicipating organizational unit. Sometimes
there are combinations of levels of measures. As
an example, 25 percent of payout is based on
how well the whole company does on retum on
assets, 25 percent on how well the division im-
proves cycle time, and 50 percent split between
two measures at the department level. All meas-
ures, however, should be aligned with the pri-
mary business objectives. (See Exhibit 6.)
An organizational unit incentive can be the
most powerful reward plan type to suppon a cul-
ture of teamwork. Organizational unit incentive
plans can make a business strategy come alive. It
is a powerful way to leverage human capital to
improve performance.
• It engages all or most of the employee base.
Exhibit 6. Organizational Unit Incentives
• It is pays out only when the improvement
• It is results-based, not activity-based.
• It provides an opponunity to communicate,
reinforce, educate, and engage employees
for the accomplishment of specific and criti-
cal objectives.
• It can be measured for effecúveness.
• It is dynamic in that it changes as business
needs change.
Organizational unit incenúve plans are usu-
ally announced for a year with the option to be
revised, kept the same, or terminated, depending
on the outcome of an effectiveness assessment.
One of overlooked aspects of an organiza-
tional uni t incentive plan is the opponunity to
create accountability for all levels of manage-
ment. Most managers are measured on their in-
dividual contributions rather than the accom-
plishment of their areas of responsibility and the
performance of their people. The discipline of
actually cutting a check based on performance
against measurable objectives provides the op-
portunity and the discipline to follow-through,
recalibrate, and actually find out what you got
for your money (something lacking in MBO and
traditional management measurement plans.)

V l !nit
_J_ _L..
.l L
.....1_ _L.
Base compensa.on C.pahlllllu lncl>lcloal !Wcopllon Projed lncend-.,s
andBe111ftll locl>i..,al lnctnthes Mtasure and rtward
Unit Incentives Attract ond r«toin oldllo and /mprove individuo/ ouurandU.s pro}tt:t re.rults
lo Base pll)' c:ompotendu ptrformanc• ptrformance • M ana¡cment-fonned Align people with
¡. Adjustmcnts ro • T echnical &. • Sales incc:ntlve • Orpnizllional oeam peñormanct
organ izationol
bMCpll)' Co=:rTracla or commlssion success, • Self-fonned
• Bendil.$ • Compelency - plano missionlvision employoeu:ams
¡. Annual Based Peñormanoe • Pieco-I'Ble oeltbrations (suggestion. Jmprove 11pon dwse
Mana¡ement • MBO-based • Spoo bonuses. continuous objectives
incent ives manog:mcnl lmprovemcnt)
• Formu b-based
iocenrives with
IJOIDftation or
award schedule
Sorne organizational unit incentive plans
are really awareness and communications plans
in drag. lt is rare that the plan designers realize
they have designed a plan that is a methodology
for the distribution of payouts based on a for-
mula, rather than a plan that improves perform-
ance. These are long line-of-sight plans. (Line of
sight is how well the employees believe lhat they
or theirworkgroup. department, etc. can actually
contribute to affecting lhe measures.) Economic
value added (EVA), eamings before taxes, return
on capital assets, and customer satisfaction in-
dexes are examples of measures that are oflen
not understood by the employees, making those
measures have a long line of sight. Companywide
measures, covering diverse divisions and de-
partments and sometimes international opera-
tions, also contribule lO a long line of sight. The
ex.istence of the plan has little effecl on the per-
formance because the measures are too remote
to the average employee.
These long line-of-sight organizational unit
incentive plans can be effective, if managemem
understands what effective means. These plans are
for communication of critical objectives, the op-
portunity lO educate employees about the meas-
ures, and to reinforce the vision and mission.
The question then becomes "is the value of a
plan worth the expense?" In more cases than one
might think, it is. This is particularly lrue when
the company has purposely decided LO pay peo-
ple slightly below the competitive labor market
and make up the difference, and more, through
the organizational unit incentive plan. The
measures used in a plan for this strategy need to
be calibrated to ensure a payout of at least that
of the gap between market and the organiza-
tion's base pay, but it is the upside opponunity
that makes it attractive to the employee. The fact
that the payout is variable with overall perform-
ance protects the company from payout unless
the performance is there.
Organizatúmal unit incentive plans give Susan the
Jocus she is looking for. She makes a strong statem.enl
that this is a jramework Jor actüm, with aligmnent to
frrimary business objectives, to engage all employees in a
com'T!Um purpose: one that is good Jor the organizatúm
a:nd good jor them. She forms a crossfunctional, muUi-
level design team who goes through a discovery process
to ensure that they u:nderstand how the employees feel
about the organization and what managemen.t will
( really) support. They design the plan and present it to
S usan after about Jour months of work, spending about
a day every two weeks in formal meetings. All payouts
are in addition to their existing reward plans (base
pay, adjustments to base pay, and benejits), do rwt
apply lo those on the management incentive plan, and
will not be added to base pay. Measure1nent of perjonn-
ance wiU be communicated each monlh, with payouts
annually. (They debated about quarterly and decided
to start conservatively with the option to change it next
year.) The basic structttre of the plan Jor all non-exernpt
and hourly employees is shown in Exhibit 7. Exhibit 8
shows an example of how payout for the plan would
work (circles indicate actttal year-end performance).
Organizational revenue growth earns 2%
Departmental cycle time earns 6%
Department measure ( custmnized lo its ttnique
needs) earns 1 %
Total of 2% + 6% + 1 % = 9% of base pay
Exempt e7nfJloyees up to those managers on the man-
age7nenl incentive plan simply could have higher pay-
The biggest surprise was lww much diffiwlty the
design team had getting agree1nent on the m.easures for
each depart1nent. What were assumed to be "tight"
measures (ajter all, they had been running the business
wit h those measures jor years) tumed out to be rwt quite
good enough when a.n incentive was tied to tlmn. They
began to call the process the "Drano effect. " It forced
people to confront the legitimacy of the rneasures and
how they could be collected and fed back to the partici-
pants in a ti1nely and creditable manner. Susan and
the team agreed the process was worth it even iJ the
'Vrarw effect" was the only outcorne of the process.
She and the team presented the plan to the rest of
top management, ajter so1ne individual preparation of
each oj the decisi.on makers. The actual presenter was a
non-exempt prodttction e1nployee who seroed on the
team. Her passion Jor the plan and insight to how the
organization worked from the "bottmn" up added a
great deal of credibility to the process. The plan was
approved if quarterly reviews are held Jor top manage-
ment and a complete assessment begins two months
befare the end of the first year of operation.

Exhibit 7. CONPRO's Organizational Unit Incentive Plan Design (Non-Exempt Employees)
% of base pay plus overtime level
Weighting Previous Level 1 Level2 Leve] 3 - Goal Level 4 Level 5
Year's (90% (70% (50% (30% (10%
Performance probability probability of probability of probability of probability
of reaching) reaching) reaching) reaching) of reaching)
revenue growth
25% 0% ofpay 1% of_Qa_y_     2.5% of_Qay 3% ofpay
cycle time
50% O% ofpay 2% ofpay 3% ofpay 4% ofpay 5% ofpay 6% ofpay
25% O% ofpay 1% ofpay 1.5% ofpay 2% ofpay 2.5% ofpay 3% ofpay
customized to
its unique nced
100% 0% ofpay 4% ofpay 6% ofpay 8% ofpay 10% of__e_ay 12% ofpay
Exhibit 8. Payout Example of CONPRO's Organizational Unit Incentive Plan Design
(Non-Exempt Employees)
% of base overtime level
Measure Weighting Previous
O rganization al
reven u e growth
25% 0% ofpay
cycle time
50% 0% ofpay
25% 0% ofpay
CUSlOmized lO
its unique need
of reaching)
1% ofpay
1% of pay
usan understands that one size (or type) of
reward plan does not fit all her business
needs. She also understands the "art of the
possible." She cannot do everything at once. Her
culture and management team needs time to
adapt toa more activist strategy in getting people
aligned with the primary business objectives and
improving u pon them. In her case, base compen-
sation and benefits are not the problem, nor are
individual incentives. (Individual incentives
Level2 Level 3 - Goal Level4 Level 5
(70% (50% (30% (10%
probability of probability of probability of probability
reaching) reachi_ng) reaching) of reaching)
1.5% ofpay h% ofpay 1 2.5% of pay 3% of pay

3% of_Qay 4% of__Eay   6% ofpay
1.5% ofpay 2% ofpay 2.5% ofpay 3% ofpay
could have been a problem if there has been a
lot of plans in the organization, something in-
consistent with a desired culture of teamwork.)
Performance management as a competency de-
velopment process, as opposed to a merit in-
crease tool, is a longer-term need.
Recognition (spot bonuses), guidelines for
an expanded use of project team incentives, and
an organizaúonal unit incentive plan are shoner
term and a quicker route to performance im-
provement and her desired culture of teamwork.
AH have clear, but different, objectives and
should be designed to complemcnt each other.
It is a mix of plans that can become the
framework for acúon for the core employees and
the management ranks. It is a carefully
considered mix that reflects the degree to which
the organization believes that people can make a
An average plan, well implemented, will
always do better than a brilliant plan, poorly im-
It is all about how you implement what you
have designed. Implementation is three-fold:
• Gaining management ownership dawn through
supervisary L-evels. Approval does not mean
commitment. Management comrnltment is
the critical distinction between plans that are
effective and those thatjust limp along with
suppon limited to lip service. lt requires
education on how the plans work and how
they are tools to engage, educate, and moti-
vate people to meet the organization's needs.
• Rolling out the plan and operating it as a business
st-rategy. Effecúve plans communi-
cate performance-to-date, educate on the
measures, and formally engage employees in
contributing to success. IL is also imponant to
get feedback from the employees on a regu-
lar basis. You have time to fix something if
you can find out what is not working earlier
rather than later.
• Assessment of effectiveness. Management reviews
of performance should be held quanerly.
Two months before the end of an annual
plan, a total review should be done,
gathering information from employees,
management, and the performance data.
Plans do not live forever. They require
refurbishment regularly.