Creating and Implementing Effective Incentive Programs

By Dexter W. Braff

While pay for performance incentive initiatives offer the promise of increased reimbursement for quality outcomes sometime in the future, some of the most entrepreneurial companies have already developed and implemented creative incentive programs to motivate its employees to reach and exceed targets regarding quality and more, including revenue growth, productivity, cash management and others. That said, creating and implementing effective incentive programs can be tricky. Here then - based on a review of the research, laced with a heavy dose of observations from the field on what has, and hasn't worked - are several concepts to consider.

Incentive programs should be highly focused. Although the bottom line (profits) is traditionally the ultimate - and the most easily measured - indicator of a firm's performance, (not to mention equally easy for entrepreneurs to conceptualize and justify internally), it is generally a poor basis for developing an incentive program. The reason is that managers and employees do not drive profits per se. Rather, they drive the inputs that in turn drive profitability - namely revenues, expenses, and collections. Accordingly, a one-size-fits-all approach is often destined for failure. Rather, the best conceived incentive programs are tailored to specific groups of employees and focus on specific activities and objectives within each of these areas on which staff have clear and direct influence.

Incentive programs must reward the "right" activities and objectives. Once you've identified "mission critical" activities and objectives that drive revenues, expenses, and cash collections, you must take a step backwards and consider "the law of unintended consequences" and whether the activity(s) and objective(s) you've isolated are indeed, the "right" ones. Consider a simple program in which sales representatives receive incentives for increasing revenues, or collections staff receive bonuses based on lowering days sales outstanding. Both seem direct and obvious yet they can yield unintended consequences. The sales rep can increase revenues by offering extremely low pricing on managed care contracts, which could actually contribute to losses rather than profits. The collections employee can reduce days sales outstanding by writing off accounts receivable rather than collecting cash, also counter to the intent of the incentive. Furthermore, the achievement of one corporate objective can sometimes be at the expense of another (consider the potential for conflict between productivity and quality initiatives). As a result, care should be taken, when necessary, to identify a cluster of desired activities and objectives to create appropriate balance. Clearly, identifying the "right" activities and objectives upon which to base an incentive program can be tricky indeed. Accordingly, both management and incentive participants should be prepared for, and expect, that they may well be revisited and revised over a period of time.

Incentives are often best paid over short time intervals. For all but the highest levels of ownership and management, you may want to forget the annual bonus plans. For mid level management, line, and support staff, such plans are often ineffective because the time delay undermines the "linkage" between the activities that trigger the incentive and the resultant payment; linkage that is necessary to stimulate motivation to perform at the highest levels. Quite simply, from a human behavior perspective, the promise of a bonus at year end for paperwork accuracy does little to motivate an employee in January faced with a mountain of highly detailed, mind-numbing, and often cryptic claim forms. On the other hand, if said incentives are paid on a quarterly (or even monthly basis), the link between the payment and the precedent activities are more real, immediate, and hence, truly motivating.

Incentives should be easily calculated. It may be tempting to conclude that a complex methodology for calculating incentive payments, based upon exceeding multiple and numerous performance benchmarks, on perhaps a geometric progression that offers proportionally greater rewards as employees achieve higher levels of excellence, is inherently more sophisticated, "accurate" and, therefore, motivating. Unfortunately, this is often far from the truth. Similar to the issues discussed with respect to time intervals, the more complex the incentive payment formula, the less clear the link(s) between the payouts and the activities that must be mastered to earn them. As a result, some of the best incentive programs are, in fact, the simplest for management and employees to monitor and track (another reason why it is critical to identify the "right" activities upon which to base a program). When possible, in the most "transparent" of programs, employees can, quite literally, calculate how well they have performed each day, solidifying the link between the performance and the incentive - motivating them to strive towards excellence.

Incentives should be offered to all levels of employees. While incentive programs are the norm for sales personnel, many organizations recognize that virtually all employees, at all levels, drive the inputs - revenues, expenses, and collections - that, in turn, drive the firm's overall performance and profitability. Accordingly, they offer highly focused incentives that reward the "right" activities, that are easily calculated and paid over short time intervals, to virtually all classes of employees. As a result, the organization as a whole is motivated to improve performance, which can contribute greatly to creating a corporate culture of hard work, excellence, and enthusiasm - a highly sought after intangible that can define, elevate, and sustain companies over time.