Incentive Systems: Keys to Success (John R. Hendon Commentary)

A question that inevitably comes up in my work with startup firms is about monetary incentives for performance. The recession of 2007-08 created a difficult environment for every business and made it even more important that businesses spend their compensation dollars wisely. Incentive pay can help improve results.

Most managers, however, struggle to differentiate the rewards they provide to their top performers from the returns to their "also-rans." So how should an incentive program be designed to maximize returns to the company? Here are a few simple guidelines:

1. Clearly separate incentives from base pay. Base pay is almost always considered an entitlement by the employee and rarely motivates employees to excel. Incentives need to be clearly separated from base pay to avoid creating the impression that they, too, are an entitlement. Employees need to understand that they only receive incentive rewards if they do something extraordinary.

2. Make the reward significant. A reward should be at least 10 percent of overall pay and in some cases 20 percent or more. Why? Very few people will increase effort for $20 per month in pay, but they will certainly pay attention to a differential of $2,080 (10 percent of a $10-per-hour employee's wages) or more.

3. Make sure that you have SMART goals and manage the program carefully using those goals. Specific, Measurable, Attainable, Relevant and Time-based goals will provide a clear link between performance and payout. Then use those goals to administer the program. Use multiple metrics to measure performance and vigilantly calculate the rewards to people who reach their goals. If the company owes even just one person an incentive award for reaching his goals, make sure it is paid. Otherwise, the word will get out that the program is a sham, and instead of being an incentive it becomes a massive demotivator.

4. Base the incentive on factors the individual or group can affect. The employee or group should be able figure out how to modify its behavior to affect the outcome of the process. If the individual or group can see no connection between what it does and reaching the goal, that person or group most likely won't change its behavior.

5. Make it understandable, and then clearly communicate the program and expected results. Incentive programs have to be understandable by every level of employee in the firm. If people can't understand what is expected of them, there is no way that they will reach the goal. In addition, all employees need to know how to participate, what their goals are, any assistance that is available to help them meet those goals and how their performance ties in with others in the company.

6. Incentives for all! Any program needs to provide performance incentives to everyone involved in the process that is being targeted. We can't just provide incentives to management, because managers then will attempt to force lower-level employees to perform so that the manager can be rewarded. This is a recipe for frustration and resistance by the line employees. On the flip side, the job of management is to remove obstacles so that line employees can do their jobs. If the manager has no incentive to do this, we end up with frustrated employees who can't meet their goals.

7. Don't reward nonperformers. It's basic human nature to want your employees to fare well, but it is a disaster for the program when other employees start to allow their goals to slip because everyone gets rewarded even when numbers aren't met. Progressive goals, providing more significant awards for meeting more difficult goals, are OK. But don't reward non-performers.

8. Promptly provide any awards owed. If the incentive is based on a calendar year goal, we should provide any earned awards on the first payday in January, or even on Dec. 31, if we already have results calculated. Why? The more separation in time between action and reward, the more difficult it is for the employee to see the connection between the effort and the desired results. A reward loses much of its motivating power if it is delayed.

Use these simple rules and your program will have a much greater chance of success in motivating the employee performance you desire.

(John R. Hendon is a management and human resources instructor at the University of Arkansas at Little Rock and a principal at, part of The VMP Group, an Arkansas-based management and HR consulting firm. Email him at