March 25, 2013

Four reasons incentives can backfire...and what to do about it


Incentives — rewards meant to encourage and motivate employees to be more productive — all too often backfire and create unintended consequences: internal squabbles, cynicism, distraction and diminished performance. However, when used correctly, they can produce wonderful results. The trick with incentives is avoiding the common pitfalls and common myths.

Myth 1:  Incentives should be focused only on what an employee can control. 
While this makes sense at face value, it ignores a huge factor in motivation: peer pressure. Many managers and contractors think that an employee needs to have full and complete control in order for an incentive to be effective, but this just isn’t the case. You can create a very quick and dramatic improvement in your company with the use of a peer-based incentive program.

For example, an entire division or company can share in a bonus (e.g., when everyone comes to work on time all week, the entire company gets free coffee and donuts the following week). Think about the corporate world where stock options are awarded to employees as incentives; yet the entire company has to perform in order for the stock value to rise.

Peer-based incentives can be used to create change in many different areas such as getting crews out on time, reducing equipment loss and vehicle damage, and improving client retention. Explain the rules clearly, as well as why the incentive is being applied company-wide (or division-wide), as opposed to individually. Treat your employees like adults and explain the reasons clearly and simply, and you may be surprised at how well your employees will enjoy the peer-based approach.

Myth 2:  An incentive should be holistic.
Some business owners try to wrap up all the critical success factors into one incentive, but this can be confusing to track and can send mixed signals to the incentive recipient.

For example, I recently worked with a contractor who thought up a comprehensive incentive for his office staff. It was very artful in engaging his office manager and addressing all the key aspects of her job, except it was too complex. It covered too many facets of her job, and thus made it hard to prioritize what was important. Incentives should be straightforward, easy to memorize and easy to calculate. If your incentive recipient cannot remember her incentive when she wakes up in the morning, it is probably too complex.

Myth 3:  Incentives will create a change in behaviour.
This is not true. Unfortunately, managers often put incentives in place expecting them to be a silver bullet and magically fix all that ails their companies. The important truth is that an incentive is merely a mechanism for how you measure change, i.e., improvement. But, in order to motivate change, you need to give employees consistent feedback and engage them in discussions on how the company is performing in relation to the goals you have set. Most employees want to do a good job, but they often lack the tools or understanding needed to do their job well. Throwing money at them is not a replacement for explaining why it is important to hit the company’s goals. Incentives will not automatically create accountability. Just as an incentive is not meant to replace a job description, so too it is not meant to replace the company operations manuals or handbook.

Myth 4:  Incentives must pay out monetary rewards in order for employees to buy in.
This myth further states that monetary rewards should be significant in order for employees to really care. Neither is true. I have seen incentives programs with no money at all attached to them work wonders.

Take, for example, a company with four crews, and imagine that these crews compete against each other, each week, to see who can finish their jobs most efficiently and under budget. Each crew is rated on how well it performs compared to its budgeted time. The results are shared in percentages; for example, 100 per cent means they met budget, 90 per cent means they beat budget by 10 per cent, and 105 per cent means they were over budget by five per cent. Whichever crew ends the week with the lowest percentage, wins.

It may make sense to do a dry run of a money-based incentive, and execute it with no money attached. This will allow you to work the bugs out of the system, and then later, if you wish, you can add a monetary reward.

If you do create an incentive based on money, it should be self-funding. The incentive should be paid out based on incremental profits earned by the company, based on the incremental results achieved. When incentives are self-funding, everyone wins.

Jeffrey Scott, MBA, consultant, author, grew his landscape company into a successful $10 million enterprise and is now devoted to helping others achieve similar success. He facilitates Peer Group for landscape business owners who want to profitably grow their businesses.