Profit sharing, stock awards, individual bonus plans, and the like are nearly always good things. They’re often the mark of a company that truly values its people. They may help to build long-term loyalty and thus foster retention.
But they are not incentive plans, according to a Forbes.com article.
Incentive plans, by definition, are supposed to affect people’s behavior on the job, day in and day out. They incent people to work harder and smarter, to go the extra mile, to collaborate with their coworkers, to come up with new ideas to improve some aspect of the business.
Those other forms of variable compensation don’t have that effect. How could they? They’re typically paid out once a year, at management’s discretion. People rarely know what they must do to get the rewards, beyond doing a good job and getting along with the bosses.
Incentive plans, by contrast, focus on a near-term goal that everybody understands. They are transparent and objective: hit the target and there’s a payout. Exceed the target and there’s a larger payout.
Companies with the most effective incentive plans involve employees in establishing team goals, thereby building both understanding and buy-in. They focus on goals that are directly related to the business’s financial performance. That way, if people hit the target, everybody wins: the employees are paid more and the company’s finances improve.
But there’s one more element that must be in place if the plan is to change behavior. It’s the keystone of the whole thing. People need to know how they can affect progress toward the goal.
The best starting point, we have found, is open-ended brainstorming. Gather employees into manageable groups and ask for individual action. The next step is to categorize the ideas, and to analyze their potential effects. That shows how significant each set of ideas is, and it is likely to provoke further discussion.
People don’t work for money alone, but they do respond to incentives — and they have a good time challenging themselves to meet a goal that they understand and that they have helped to establish. That’s when behavior starts to change, and that’s when business results start to improve.