Motivating staff performance through incentives is a critical part of successful talent management and HR strategies. Do it well and employees are aligned with corporate objectives, benefiting the whole organisation. Mess it up, warns Bill Schuh, and you encourage behaviour that will damage your business.

We are currently seeing the fallout from incentives that rewarded short-term risk taking by bankers, which is one of the key causes of the current global financial crisis. So how do HR professionals in all sectors better use and control incentives to help achieve corporate objectives?

First, let’s look at the benefits of incentive pay. It is a great motivator to ensure that staff go the extra mile and are focused on achieving their objectives. Clearly set out incentives mean that employees feel rewarded for achieving corporate goals, and bonuses are earned rather than distributed as seasonal perks.

However the ‘carrot’ approach of incentive schemes means they need to be well-thought out and clearly defined. Those incentives take into account long-term as well as short-term goals. In many other organisations and sectors outside financial services, employees have analysed incentive schemes and worked out the easiest way to earn their bonuses, which may not correspond with the behaviour desired by their employers.

While it is central to the sales function, incentives can be easily applied across the whole organisation. Customer-facing staff should be incentivised on the service they provide, measured through customer audits. Retention of customers or staff should be used to judge the bonuses of middle managers, while achieving manageable share price growth should set senior management rewards. In current economic circumstances, incentives have an even stronger role to play. By freezing salaries and using bonuses to incentivise staff who add value to the organisation, costs are kept under control and employees feel they have something tangible to aim for.

Formal framework

Applied and managed correctly incentives beneficially support a well-run business. So why are they not at the heart of more organisations and their HR policies? Primarily it is the difficulty of administering all but the most simple incentive schemes. Schemes need to be transparent, straightforward and achievable. But to measure their success they need to be underpinned by a formal framework and industry standard software. Essentially commissions and incentives need to be rigorously managed in the same way as any other fiscal cost in order to provide the visibility that HR managers need.

To gain the undoubted benefits of incentives, companies need to manage them professionally in a planned, strategic manner, rather than treating them as ad-hoc rewards applied without rhyme nor reason. There are three main stages to professionally applying incentives – automation, objective setting, and performance measurement.

Automation puts in place the ‘single version of the truth’ necessary to underpin incentive schemes. Too many organisations rely on low level spreadsheets when setting objectives and measuring performance. These are error-prone and not integrated with wider HR and business systems. In contrast, professional performance management tools provide the ability to bring together financial data with individual objectives to give information that can be relied upon by the whole organisation.

Setting measurable, clear and reasonable objectives is the next stage in successful incentive management. HR departments should look to create outline objectives that can be cascaded through the organisation, amended for different roles, but based on the same underlying vision. This ensures that the objectives of all employees are aligned with those of the organisation rather than simply the needs of their immediate manager. This process can be accelerated through the use of technology to roll out and gain sign-off on objectives, replacing slow and cumbersome manual processes.

Measuring performance

The final component in successful incentive management is evaluating performance against objectives. Through regular, scheduled reviews employees should be able to see and measure performance against goals. This way, employees are motivated to achieve objectives and are always aware of their progress. Making this information available either via self-service systems or regular updates from HR removes any need for ‘shadow accounting’ where staff keep private notes on progress. Instead, the time can be freed up for selling or other assigned business activities. Obviously once objectives have been met, the process begins all over again with new objectives set and disseminated to staff.

Outside the incentive cycle, implementing performance management systems provides key benefits in terms of visibility and flexibility. Management has the information necessary to run the business and the ability to change course by tweaking incentive plans to meet evolving business conditions.

Professionalising incentive management not only benefits an organisation generally but also helps HR to show its strategic importance. By providing the link between organisational objectives and employee performance, it contributes to overall business success and delivers the visibility and control that companies need to flourish.

Incentives and rewards are nothing new in the business world. However, changing economic conditions and the ability to control incentives on an organisation-wide basis are now making them central to successful businesses across all sectors. Managed well, incentives will increase employee performance, align staff with corporate objectives and contribute to the bottom line, benefiting everyone.

Bill Schuh is VP for Europe at Callidus Software.