How to Create An Effective Employee Incentive Program
In today’s workforce, a great benefits package doesn’t carry as much weight as it used to when trying to attract & retain top talent. Job security and other perks are important, but maintaining a high level of performance in your team requires a different approach.
With many employees today rating their engagement at work surprisingly low, investing in an incentive program can make work more tangible and rewarding for those who go above and beyond what is expected. A well-designed program can motivate your team to perform well while also boosting team morale and company loyalty.
Human resource professionals will have a key role in making sure any incentive program is both effective and worthwhile. Here are some thoughts to shape your thinking as you work to design an incentive package that will attract top talent.
What Makes an Effective Program?
Effective incentive programs are characterized by good motivation and presentation.
When designing a program, first understand what motivates your workforce. Failing to understand your employees is guaranteed to result in low participation.
However, even a well-designed system will fail if not presented well. A good program must be framed as immediately engaging, fun, and friendly to your team members.
An incentive program should be presented as an extension of the company itself. When developing your employment brand, an incentive program goes a long way in depicting what it’s like to work at your company. Establishing this level of brand consistency will align the goals of the company with employee goals.
In smaller businesses, this can often be achieved informally. Verbal agreements for rewards go far with employees who have personal relationships with management. Small teams will already have an established trust for one another.
In larger corporations, these will need to be documented as an ongoing program in order to have any effect.
3 Elements of Effective Incentive Programs
In essence, an employee incentive program consists of goals, rewards, and tracking the desired results in pursuit of those goals. The purpose of the incentive program is to achieve good performance from your employees by offering rewards in return. To ensure that the plan is effective and profitable for your business, you will need to track certain data and make adjustments to your processes as necessary.
Here are some examples of effective incentive structures:
- Sales Commissions - Sales representatives may be incentivized to make a certain number of sales by a certain recurring deadline. In this case, the goal would be the sales quota and the incentive would be commissions on an increasing scale. Tracking would consist of both employee metrics and profitability of paying out commissions.
- Profit-Sharing - Similar to commissions, profit-sharing incentives can increase company loyalty and teamwork. The goal is to increase company profit. The employee is rewarded by receiving a percentage of that profit. For this structure, you may want to track how much the employee directly contributed to that success and any other sales goals associated with the desired result.
- Production Bonuses - Especially in warehouse and manufacturing jobs, employers may offer team members a specified bonus for producing a certain amount of product. This can be an individual quota or a team effort. In any case, the goal is the product produced, and the reward is the bonus. Tracking may consist of how much each worker contributed to the goal.
Each goal-reward structure will encourage different results. To decide which structure works best for your company, you will need to pay careful attention to how you design the program.
Meeting goals should feel like a win-win situation for both the company and the employee. In other words, the company should succeed when the employee does.
It is also important to align employee goals with the objectives of the company as a whole. You do not want to encourage production goals that interfere with quality goals, or vice versa. To design effective incentives this effectively, consider the objectives on both employee and company-wide levels.
Goals for the Company
First, decide what the company wants to achieve overall. If you are considering an incentive program in the first place, you will likely already have an idea of this.
However, you don’t need to be concerned with the methods required until you know what you would ideally like to accomplish. Brainstorming sessions and company meetings can help decide this.
Once you have a broad idea of the company goal, make the goals more specific by laying out the required steps. Then, define key roles that can perform each part of the overall task. Ask whose performance is essential to meeting the desired result. Who can be incentivized to meet these smaller goals?
In some cases, you may need to create different incentive programs for different teams. This may require a complex solution in which each team works toward different goals to achieve the ultimate goal. In this situation, you will want to make sure the goals for employees are simplified.
Goals for Employees
When designing smaller goals for your employees, it is first important to define success. Understand each team’s responsibilities and create achievable targets that align with the overall objective. While these goals may vary, effective goals are clear, purpose-driven, and time-bound.
Make employee goals clear and easy to understand. Team members should have no doubt about what it means to perform well in their role. Convoluted systems and formulas will only cause frustration.
These goals should also be measurable and objective. Especially in larger corporate settings, goals will often take the form of certain performance metrics. This helps eliminate any subjective bias. If the employee and manager do not agree about an undefined target, there may be tension and lack of motivation to succeed.
Achievable but challenging goals are the most effective. Targets that feel impossible to meet will frustrate employees and cause them to stop trying. On the other hand, an easy goal may cause an employee who would otherwise push themselves to become complacent, since they easily pass the target.
Designing for Purpose
Incentive programs rely heavily on the relationship between the goal and reward. This means that success should be within the employee’s control for the most part.
While some outcomes (such as customer satisfaction or ratings for a service rep) are subjective and not directly controllable by employees, they should be able to influence them in some way.
Slight variations in setting goals can encourage either a team effort or individual achievement. For instance, you may decide to reward an entire team for meeting team production goals. This type of goal-reward system will cause employees to focus on achieving the goal together.
You could also create a target for each employee that still meets the overall goal for the team. This can promote individual accountability.
Be sure to set time limits with employee goals. Each team member must achieve their target metric or performance standard by a certain weekly, monthly, quarterly, or annual deadline. Having regular time limits for goals increases accountability and makes the desired performance a matter of urgency.
When creating a system of rewards, it is first important to consider motivation. There are a number of rewards you may decide to use as incentives. On one level, incentives act as positive reinforcement for good performance. On another level, rewards can help team members feel appreciated and instill a sense of value in the work completed.
Consider multi-generational differences when implementing rewards for your team. Some employees may not be motivated by the same factors as others. Consider multi-generational differences when implementing rewards for your team. When possible, personalize rewards and provide a variety of reasons to perform well.
As a key aspect of effective incentive programs, you will want to be intimately familiar with what motivates your employees. Since the most common form of reward is monetary compensation, consider how much money would motivate your employees to perform better.
A good rule of thumb for developing a financial incentive is to make it at least 10% of an employee’s overall compensation. Promising any less than this may result in the employee not caring to receive it at all.
Types of Rewards
Be creative with the incentives you offer. Diversity in your rewards system can prove to be widely effective at surprisingly low costs. Luckily, there are a number of ways to do this.
The most obvious form of reward for good work is money (in addition to regular wages, of course). Project bonuses, profit-sharing, retention bonuses, commissions, discounts, coupons, and gift cards are all effective ways to reward good work with extra money. While motivation for monetary rewards is strong, these incentives will have a higher cost to implement than others.
A vastly underrated form of reward is simply recognizing an employee’s good performance. Publicizing the results of individual effort or quality of work can help employees feel valued in a way that money may never achieve. Thank-you cards, employee of the month awards, and verbal words of affirmation can be highly effective at little to no cost to the company.
You may provide opportunities for skill development as a reward to employees. These development sessions can help the employee achieve a promotion within the company. This type of reward incentivizes good performance with the hope of a better salary or position. It also shows that the company cares about the employee’s career.
You can also offer employees more freedom as an incentive. While many people are working from home during the pandemic as a default, this is normally a good way to reward good performance and establish trust. Employees can receive more autonomy or freedom to choose how they work as a direct result of proving they are responsible and competent in their role. Freedom to schedule breaks or decreased oversight are good examples of autonomy incentives.
Similar to monetary rewards, point systems can motivate employee performance by offering a valuable prize. In this structure, goals are assigned certain point values. Points can then be redeemed for valuable prizes like concert tickets, technology, gift cards, and other valuable items. The advantage of a points system is that it affords the employee the freedom to choose their own reward. A variety of prizes can also motivate a variety of different employees.
NOTE: If you decide to implement this type of reward system, be sure that choosing a prizes is simple with accessible technology. The challenge should be the job performance, not navigating a complicated user experience.
However you decide to incentivize your employees, be sure to pay out these incentives at regular intervals. This will reinforce any deadlines and consistently approve certain habits that have developed as a result of the program.
Paying out incentives for occasions not related to performance or on an inconsistent basis may dilute the motivation to perform. If the same prize is awarded for birthdays as for sales quotas, employees may not perceive it as valuable.
As your employees continue to work with initiatives in mind, you will need to keep track of their progress to manage the program. This often takes the form of performance metrics, performance reviews or meetings, and assessments for the outcomes of the program overall.
Employee Performance Metrics
In larger corporate settings, there may already be KPIs in place for each employee. In any case, you will need to track all required metrics that define success in each role. For instance, if the goal for customer service is a certain number of calls per day, you will want to have a method in place for tracking the number of calls.
You will also want to track other metrics that may not be directly tied to a reward. Monitor how the incentivized behavior affects performance in other areas of work.
This will typically require tracking technology that also compiles data reports for various timelines. Luckily, there are a number of programs available to track employee metrics. Be sure to invest in good technology that allows you to objectively report performance and success.
Meetings and Performance Reviews
While employees may already know about their own metrics, it is still a good idea to have regular meetings to discuss them. Many corporations implement annual, quarterly, or monthly performance reviews.
Frequently discussing goals works to reinforce target metrics, provide support, and encourage continued success. Certain goals and incentives benefit from more frequent meetings. Consistently scheduled reviews will also create accountability within the team.
Human Resources should help create the rubric for performance reviews to eliminate bias. It is also important that the relationships among team members and supervisors are healthy and productive.
In addition to the performance of each employee, tracking the results of the incentive program as a whole is essential to success.
Continuously monitor the effects of the program both before and after introducing it. Has the team’s performance improved? Is the program helping the company achieve its desired goals? Assemble ROI data and decide if the plan continues to be profitable.
Take a look at the team culture and look for any undesirable behaviors that have cropped up as a result of the program. Sometimes, poorly designed goals and rewards can create a hostile team environment. While this may produce success in the short term, it will harm the team’s ability to perform over time.
Remember that participating in the program should be fun. Team members should look forward to coming to work and achieving success among peers.
If the program is not meeting the desired goals or is hurting the company’s profits, you will want to adjust as necessary. However, it can be difficult to change course once the program is in place. Set deadlines for re-assessment and build in some flexibility beforehand if possible.
Further Considerations for HR
The key portions of developing an incentive program are in the design process. However, Human Resources must also consider the legality, cost, and potential ethical drawbacks of implementing any proposed solution.
Before finalizing the plan, you will need to make sure you account for taxes and employee legislation. This is especially important with bonuses and other monetary rewards. Here are some things to consider:
- Taxes - Determine if the incentive is part of the employee’s taxable wages. Check to see if the incentive is tax deductible for the employer. With either of these, you will also need to prepare for payroll and any required documentation with the IRS.
- Total Compensation - If the incentive is part of the employees total compensation, you will need to consider this when running payroll. You will also need to decide what type of bonus (discretionary or non-discretionary) you are offering, according to the FLSA (Fair Labor and Standards Act. In some cases, you may need to consider monetary incentives when calculating overtime.
- Type of Employee - Consider also the employee’s classification as either exempt or non-exempt. Some employees may not be eligible to receive the incentives you offer.
When considering a plan, you will want to make sure it is cost-effective for the company. Make sure it is worth the money to proceed, lay out budgets, and inform any public shareholders of what it will cost to implement. If the solution is not ROI-positive, you will want to restructure the plan or do away with it altogether.
Employee and Manager Relations
Human Resources has an important role in the ethical operation of the company. Because of this, it is important to foster good communication between the employees receiving incentives and supervisors in charge of them.
Be sure all managers are trained in how the program works and how best to present the program in any performance review meetings. Eliminate bias by reinforcing the objective standards and goals for the plan.
Designing an effective incentive program is about making good performance feel tangible and meaningful. No one wants to work for nothing in return. While we all might work to receive our basic wages and benefits, motivations for good performance can change over time. Employees expect more from companies, and they will not tolerate being undervalued.
It can be difficult to develop and manage a good reward system for your company. If you need help training managers, motivating employees, or working incentives into your company’s payroll, the professionals at Criterion can help you develop a plan. Book a personalized demo to see how a unique HCM solution can improve your team.