Incentive pay schemes can be a effective way of keeping staff motivated. But such initiatives can go wrong if the business has an inappropriate culture or the scheme is not managed effectively. HR Zone business editor Dan Martin examines the pitfalls to watch out for when running an incentive pay scheme.

For managers, productivity is vitally important while for employees recognition and encouragement are key drivers behind their behaviour. One possible solution to uniting both aims is incentive pay schemes. Well thought-out and effectively managed incentives can help to motivate and improve staff productivity. However, badly-run schemes can prove immensely damaging to an organisation.

The types of incentive pay schemes vary according to the type of organisations and employees affected. They can be used to encourage sales staff to hit sales targets during advertising or new product campaigns, persuade marketing employees to put more effort into achieving customer service enhancements, for managers as a way of retaining key staff or to raise general productivity and morale across the entire workforce.

Incentives versus bonuses

It is important when deciding what sort of scheme to introduce that HR departments bear in mind the distinction between incentive pay and bonuses as they are not the same thing. “Incentives offer something in advance for doing something,” says Duncan Brown, assistant director general at the Chartered Institute of Personnel and Development (CIPD). “Bonuses such as profit sharing or employee share schemes are not incentives. They encourage and engage people to belong but do not drive behaviour.”

Experts claim that many of the organisations that struggle to run effective schemes do so because they confuse the two options. David Conroy, principal at HR consultancy Mercer, says this is true of many of the firms that come to him for help. “We ask clients to review their existing bonus scheme,” he comments. “Often they are variable amount of pay from the base but the way they are designed is not an incentive. We get clients to backtrack and ask them what are you trying to do? For instance, is it targeted on individual or team performances?”

Avoiding the pitfalls

Is it appropriate?

One of the major areas where firms fall down on incentive pay schemes is they introduce them within a organisation with an inappropriate culture and make-up. “Many firms think cash incentives are an easy lever they can pull,” Brown adds. “But they need to think about what they are trying to achieve and when implemented how they need to change the scheme as the organisation changes.”

If designed correctly, schemes can work for most organisations but they generally more successful in certain businesses. “Incentives work the best in organisations where clear performance goals and measure of performance are in place,” says Brown. “They are generally relevant in direct business situations such as selling.”

Where more complication business relationships exist, successful incentive pay scheme are harder to achieve. The public sector, for example, is an area where traditional incentive pay schemes can prove problematic. “In public organisations there is a complex culture with a complicated performance agenda,” Brown adds. “It’s not about achieving a particular sale so individual pay incentives may be difficult to apply.”

If only one group of employees are taking part in an incentive scheme, it can lead to those not covered feeling alienated or discriminated against the rest. Cross-company incentive pay or non-financial options can be used to solve this problem.

To combat such problems in the public sector, the Cabinet Office has designed the ‘Total Rewards’ programme which takes into account both the tangible and intangible benefit offered by an employer. Whereas traditional methods such as incentive payments, share schemes, medical insurance and a fully-expensed car may be included in public sector workers employment package, the scheme includes intangible areas such as work-life balance and training opportunities which can incentivise staff as well as or even more so than financial options.

Design

Even where incentive pay schemes are glaringly obvious, problems can still crop up. Most of the failures can usually be put down to the way the scheme is designed. Mercer’s Conroy says over complicated design is the most common problem he comes across. “Problems often occur because the scheme is too-complicated from the start or because it is continually developed and tweaked with new things just chucked in.”

That is not to say, however, that evolution of a scheme is not important. Incentives often become less effective as employees get used to them so schemes should be changed according to a business’ individual circumstances. If, for example, a scheme is designed to focus on one particular result, the time should be limited such as when a particular backlog of orders is cleared. “The best incentive schemes are those which evolve over time as the organisation develops,” says Brown.

As a business progresses, circumstances may mean that incentives become less appropriate. For several decades in the insurance industry, for example, schemes worked well in simple sales environments but over recent years a more complex situation has developed which has led to problems such as mis-selling.

Management

It’s all very well setting up an amazing incentive pay scheme but if it is not managed correctly it will fail. “Poor managers see incentive schemes as a substitute for their own management,” says Conroy.

Problems can also occur if the information required to assess the incentive payouts is hard to get hold of. “Managers should ask how valid and how timely is the data?,” advises Conroy. “Managers can often spend time having to add up a quarterly pay-out but because it takes so long to validate the data, it takes another quarter for the employee to receive it. That too far extends the gulf between effort and reward.”

Managers should also be effective in their communication of a scheme. Even the best designed scheme in the world will fall down if it is poorly communicated to the workforce.

Non-financial incentives

For many employees, particularly those working in non-sales environments, financial incentives will not be appropriate. Several studies show that many employees are far more motivated by non-pay related measures.

June Williams, director at Investors in People, says a common management assumption is that cash perks are the best way to reward staff. Research by Williams’ organisation has shown that 43% of employees cite job content or the challenge of their roles as the main motivator in the workplace, and only 14% say pay is their top incentive at work. “Improving communication and simply thanking employees for the contribution they are making can also make a real difference to employee motivation and, ultimately, an organisation’s bottom-line,” Williams says. “Everyone knows that recruiting and replacing staff is costly, so those companies that don’t follow these simple steps to help incentivise their staff are really missing a trick.”

To incentivise or not to incentivise

Incentive pay schemes can without doubt bring high level benefits to organisations. However, whether or not to introduce one should be considered carefully by HR departments to decide whether it really is appropriate for their particular organisation. If it is, then managers of all levels should take steps to ensure it is correctly administered. If financial incentives are not appropriate then simple communication and employee development techniques could make just as big a impact on boosting staff motivation and productivity.