Employee Incentive Programs
Improving Morale and Organisational Performance
by Bay Jordan
Employee Incentive and Recognition Schemes have become significant elements in the HR toolbox. This is hardly surprising since competitive pressure and the pace of change have increased the demands on everyone at all levels of any company, and human performance has become notably more integral to the success of the company. Performance related pay (PRP) with its giveaway "OTE" (on-target earnings) has become ubiquitous. Yet despite this there have not been commensurate increases in productivity. This article explores the reasons for this and looks at:
The Nature and Objectives of PRP
"Performance Related Pay" is the formalising of the link between personal performance and remuneration. It is an attempt to bring the traditions of "piece-work" associated with the Agricultural Age to the late stages of the Industrial Age and the early stages of the Information Age.
The primary objectives/perceived benefits of PRP are to:
Shortcomings of PRP
The theory certainly sounds good, but the fact that PRP schemes do not result in the anticipated productivity improvements, as intimated earlier, indicates that the theory is flawed or otherwise counterbalanced by events in practice. To explore this it is necessary to look at the theory a little more closely.
Control over income
This point is persuasive, and indeed statistics show that it can be very effective initially, but tends to become less so over time. This can be attributed to any one or more of the following:
- Money being a notoriously ineffective motivator over time for the majority of people
- Linked to the last point, the diminishing marginal value of the increased income
- Employees having little ability in reality to alter their behaviour to significantly affect their earnings potential
This is perhaps the area where there is the greatest divide between theory and practice, for employees cannot, and invariably will not, take ownership of their own jobs if they are not empowered to work with others to overcome the day-to-day issues that form the barriers to their better performance. Traditional command and control disciplines, enforced by the dictatorship of job descriptions, undermine initiative and independence of thought and action and so sabotage all the good intentions of PRP. PRP thus remains pointless in such traditional environments.
The key here is perhaps the alternative name "Incentive-based Remuneration." Psychologists agree that incentives have no lasting benefit, and we have seen already that money has limited motivational value. This is because the initial stimulation here is not the money per se, but rather the thought of what that money will get. Thus as soon as the money has served its function as a medium of exchange for the desired article it loses all its motivational properties.
Furthermore it goes without saying that the minute it appears that there is a likelihood of not earning their incentive, the whole point of PRP is invalidated, because there is now nothing to stimulate the additional effort desired that underpins the whole concept.
This last point leads to a key element of effective PRP - the need to balance the employer's interests and those of the employee. This calls for:
- Mutual understanding of the employee's activities and what is involved
- Mutual agreement as to how performance is to be measured
- Compromise as to what constitutes a reasonable "stretch" target that balances the requirement for improved performance with a fair chance of its attainment
- Rules and measures that are readily understandable, easily produced/verified and that cannot be manipulated by either party
- A degree of flexibility should circumstances arise that warrant a change.
Unfortunately all too often these elements are not all in place, with the result that one or other party is left feeling dissatisfied or exploited. Often it is the employer, who, because of the demotivational aspects of missed targets, allows targets to be set that are too easy, and thus the bonus element simply becomes a de facto pay increase; an employee "right" with no link to a real improvement in productivity.
This is actually rather ironic, for PRP schemes can initially be seen by a sceptical and mistrusting workforce as a management tool to squeeze more out of them - which, given the goal of improved productivity, is not incorrect, although intended to be more of a win-win scenario.
Having established the problems of PRP, in the second and final part of this article we'll take a look at what positive steps can be taken to improve motivation and organisational performance.