Performance Management

What is Incentive Management? 3 Best Practices For Building an Effective Incentive Management Program

If you’re considering starting an incentive program at your organization, you have good reason to. Eighty-five percent of the workers surveyed in a 2018 Genesis Associates study said they feel more motivated to try harder at work when they get an incentive.

However, horror stories abound of companies that wasted millions due to ineffective or easy-to-game incentive management. The most infamous example happened at Wells Fargo, where employees opened more than two million illegitimate accounts to meet their quotas. The offered incentives didn’t align with reality, causing employees to resort to unethical methods instead of legitimate growth.

So, how do you perform incentive management that inspires employees to improve their job performance? When creating an incentive program, choose incentivized behaviors relevant to your employees as well as the business, and choose a time frame and compensation type that gets your employees excited. If you don’t, you could end up funding a program that’s ultimately a drain rather than a performance booster.

What is incentive management?

Incentive management is the practice of offering incentives like pay, extra time off, or a gift to employees that meet certain benchmarks or perform specific behaviors. A classic example of an incentive program is a system where a sales rep gets extra pay for closing a certain number of deals in a quarter. Businesses start incentive programs to encourage and reinforce the behaviors they want from their employees.

But, incentive management isn’t limited to one-time cash bonuses for sales reps. Regardless of department, you can promote incentives like an L&D incentive program with tuition reimbursement, rewards for educational event participation, or bonuses for high scores on customer surveys. Some business-wide examples are profit-sharing programs that contribute to the employee’s retirement and performance recognition/reward programs that deliver ongoing bonuses.

Incentive management isn’t limited to one-time cash bonuses for sales reps.

Incentivize actions that align with company and employee goals

When you decide on behaviors to promote in your incentive program, make sure they line up with your company’s and your employees’ goals to ensure they deliver high value and high impact.

Choose incentivized behaviors that support your business objectives

Define the results you want from your incentive program based on:

  • Company objectives and values: Your incentive program’s structure and promoted behaviors should align with company business objectives as well as company culture. Your program needs to speak to the values you promote in your day-to-day operations. For example, if your organization claims to value work/life balance, you don’t want a program that rewards excess overtime.
  • Employee input: Employees often have ideas for specific behaviors that can help your team reach broad-scope goals, such as reduced rework for improving job margin dollars. Since they work toward organizational objectives every day, they might notice micro-trends that contribute to macro-trends.

Define objectives that promote employee development

Now that you know the overarching goals of your program, it’s time to translate them into actionable behaviors for your employees. Effective incentive management objectives encourage employees to do their best by providing clear benchmarks for them to meet that align with your organization’s current reality.

The SHRM official toolkit suggests defining measurable incentivized behaviors, consistently measuring outcomes, and adjusting your desired behaviors as needed to adapt to unforeseen circumstances. You need metric-based benchmarks to determine if your team members are reaching your program objectives. But, you’ll also want to keep an eye on those benchmarks and change them if they grow out of a reasonable scope for employees.

Set an incentive program scope that maximizes motivation

When you define your incentive program’s scope and participants, it’ll become easier to allocate your program resources and keep it manageable for everyone involved. SHRM senior certified professional Stacey Carroll recommends setting challenging but feasible benchmarks for employees: the goal is to set rewards that push employees beyond their normal performance without making them feel out of reach.

Decide who will participate in your program and how

Some organizations run department-specific incentive programs or programs that measure group performance over individual performance. The right approach for your company will depend on your team’s OKRs and sources of motivation.

To decide if you need a company-wide or group-specific program, examine OKRs to look for organization-wide and department-wide patterns. If you see employees having difficulty reaching OKRs organization-wide, you could create a company-wide program, and if you see room for improvement in a certain team or department, you can run the program on that level.

You should also consider if you want to run a group incentive program among departments or groups within a department, such as rewarding sales teams for their collective quotas. Some organizations prefer group incentive programs because they encourage cooperation among team members over competition. In addition, one study shows that team-based incentives can improve performance by as much as 45% compared to individual programs’ 27%.

Related: Our 3-Step Process for Using OKRs to Drive Performance (+ Free OKR Template)

Choose a short-term or long-term program

You’ll also need to examine if your team needs a short-term campaign or an ongoing policy to improve their performance under your incentive program.

According to a Namely report, the most common time intervals for incentives are on an annual basis, a quarterly basis, or on the spot. Psychology research suggests that more immediate rewards provide more intrinsic motivation, so consider structuring your program to provide a steady stream of rewards regardless of program length. Shorter reward intervals can also help employees track their performance more frequently compared to annual reward periods.

Look at OKRs and KPI trends to see if performance needs are recent or ongoing for program length guidance specific to your employees. A democratized needs analysis, which is where you consult team leads about their team’s performance needs, can add context to those numbers. Checking out OKRs will also reveal what intervals your employees use to measure their own goals so you can set timeframes that align.

Select a motivating and equitable compensation model

Incentive management compensation can go beyond cash payouts. Whatever you choose, make sure to keep your compensation type and structure equitable and attainable for everyone.

Examples of incentive management compensation include:

  • Stocks
  • Prizes
  • Flexible working options
  • Redeemable points for time off or gifts
  • L&D opportunities
  • Office perks
  • Charitable donations in the employee’s name

According to an Incentive Research Foundation study, employees prefer time and experience-related rewards such as time off, flexible scheduling, and paid lunches/events. They ranked trophies, free company merchandise, and company-wide recognition emails the lowest. Of course, every team has different values, so try surveying your employees to see what they want before you assume.

As you design your incentive plan, think about how much your compensation will matter to different employees and implement checks and balances to promote equity. Research shows that the gender pay gap widens by 2% when incentives are involved. Considering that gender is just one inequality that contributes to pay disparity, it’s vital to ensure that people of different demographics get fair incentives.

You can start promoting equity in your incentive program by using objective measures and making sure that goals are reasonable for everyone. For example, at 360Learning, we eliminated salary negotiation for more equitable pay—a practice you can apply to incentive management by focusing on quantifiable performance measures. You should keep individual abilities and opportunities in mind as well, such as by considering if parents or people with disabilities could manage the schedule commitment you ask for.

Incentive management is a team effort

The most effective incentive programs are a team effort among leadership and employees. Take a communicative, bottom-up approach to incentive management where everyone is involved in decision-making and shares regular feedback on their experience. You might find that distributing your incentive management authority will improve your team’s accountability and commitment to their goals.