Does incentivisation work?

The IoD Berkshire branch had an interesting discussion on this topic recently.  Here's my take on the subject:

The underlying assumption is that rewarding employees for achievement (usually financially) will encourage them to work harder and achieve more in pursuit of those rewards.  This view is not borne out by academic research but in practice bonus schemes are widely used.  A carefully-designed bonus scheme when implemented on top of good management practices in a well-run business is a useful management tool – but it is not a substitute for these things.

How to design an incentivisation scheme

-          Incentivisation schemes can be implemented at individual, team or organisation level or use a combination of these

-          Ensure that the rewards incentivise the behaviour you want, are tied to outcomes the employees can affect and match the motivations of the employees concerned (which may not be financial).  For some staff it will not be possible to link performance directly to financial outcomes (for example a customer support desk)

-           Understand that as circumstances change every incentivisation scheme will have unexpected and often unwanted side-effects

-          Check that you can afford all possible outcomes

-          The maximum bonus should be enough to recognise over-performance but restricted in terms of total earnings - a maximum of 50% of basic salary, usually far less

-          Tie individual bonuses to overall company performance ie an overall profitability hurdle must be achieved before individual departmental performance related pay kicks in.  The downside of this is the fact that good performers might not get what they deserve but at least it avoids the situation where you can’t afford to pay

-          Bonus payments must be self-funding within the bonusable period; that is; they must be more than covered by the improved profit delivered by the over-achievement which triggers the bonus payment

-          Make sure that base and bonus targets match the business plan and budget

-          Link bonus payments to profit not turnover – and cap them

-          Bonus payments should be at the absolute discretion of management

-          You might want to add other desirable outcomes to the scheme. For instance, you could make “100% of department having a job description and appraisal” or “Complete project X” bonus targets

General

-          The overall bonus scheme rules should be published and each individual should have a written copy of their own targets and rewards, signed by them and their manager

-          Bonus targets should be agreed as part of the business planning cycle and before the start of the year concerned

-          Performance against targets should be reviewed as part of the appraisal and performance management process immediately after year-end

-          If in doubt, keep it simple

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