Risk and reward

You can lead a horse to water but you can’t make it drink. It may be an old saying, but it happens to be true, and nowhere more so than in the case of employees. Some people seem to be born with a high level of self-motivation: their reward is a job well done. Others require an external stimulus to encourage them to do their best. This is where the question of incentives comes in – is it worth spending money to keep your employees sweet?

“It's crucial to maintain open lines of communication when building the basis for an effective employee incentive program.”

With memories of the recent financial downturn still fresh, you could be forgiven for thinking it's an academic question anyway. After all, according to one source, in 2009 nearly 25 percent of employers said they completely cut their spending on benefits/incentives if they could. Other incentives, including more vacation time, flexible hours and the ability to work from home were named as alternatives.

Now the signs of economic recovery are here, however, and with them has come a renewed focus on incentives. This could be the perfect opportunity for HR managers to revitalize their company's incentive and reward programs. Achieving high levels of employee motivation are crucial to a company's success: if your employees don't perform, neither will your business.

According to the Incentive Federation, before the downturn, North American organizations spent approximately $27 billion a year on merchandise and travel incentives. Cash incentives included, the total exceeded $115 billion. And an analysis by Incentive Research Foundation found that properly selected and administered tangible incentives (cash and awards) can dramatically increase work performance. The analysis also found that when tangible incentives are carefully selected, implemented and monitored, they increase incentivized work performance an average of 22 percent.

Tangible incentives were also shown to significantly increase one's intrinsic interest in job task. Claims by previous studies that tangible incentives often cause unintentional decreases in work's intrinsic value were not supported by current research.  In 57 percent of the cases reported, objectives were either met or surpassed.  In 92 percent of the cases, objectives were surpassed, met, or at least partially met.

The Incentive Federation survey showed that if selected, implemented and monitored correctly, incentive programs can increase performance by an average of 22 percent. Team incentives can increase performance by as much as 44 percent. Incentive programs were also found to assist people in pursuing work-related goals, to help attract quality employees, and to be valued by both managers and employees.

But before we get carried away with all these positive numbers, we need to remember that an incentive plan should be planned carefully from the implementation stage, because even the best incentive programs can be negated by poor presentation and delivery. A survey conducted by the Incentive Research Foundation of companies using incentive programs found that while such programs are highly valued by both employees and management (99 percent of all survey respondents), 98 percent of respondents had complaints about the way the programs were implemented.

Before you begin, ask yourself the following questions: what can I do to motivate and engage employees and encourage positive behavioral change? And how can I improve the flow of dialogue through all levels of the company? You need to know why you are implementing the plan, what your goals are, and what you want the end result to be - perhaps an improved reputation both within and outside the company, as well as higher levels of engagement and motivation.

Tailoring

There's also no point working up a wonderful bonus program if it turns out the resulting incentives are not something your people value. In order to discover what incentives will work best in your company, start by reading industry magazines and HR reports to find out about the trends are in employee benefits and incentives. This will help ensure your program stays competitive with others in the market.

Next, divide employees up by level. Even in companies were drawing attention to vertical stratification is discouraged, differences in level need to be acknowledged so that incentives can be targeted appropriately. It may be necessary to speak to upper level managers individually to determine what will work best for them. To efficiently canvass the views of large groups of employees, consider conducting a survey and encourage input about the appeal of particular types of rewards. Any surveys should be anonymous so employees don't feel negative comments could jeopardize their jobs. Use the results to tailor your incentive program more closely to the needs and desires of your workforce.

Above all, it's crucial to maintain open lines of communication when building the basis for an effective employee incentive program. People need to be encouraged to talk openly with HR about their concerns, in order to help establish a program that suits them.

The Incentive Federation recommends the following steps prior to the implementation of an incentive program. Assessment: Examine your business closely to see if there are any gaps in performance, where behavior could be influenced through incentives. Selection: Choose between a general recognition program and one based on quota or performance. Value: Ensure the value of the program is communicated to employees through adequate communication and support.

Training: Provide enough support and education to ensure people can achieve the goals required. Support: employees need to believe in the program and have confidence that rewards will be fairly given. Engagement: Award programs should be structured to elicit maximum engagement from employees, as this encourages the biggest performance gains.

Measurement: The Federation recommends that three aspects be measure: active choice (choosing to do the targeted work in the intended manner), commitment (persistence over a long period of time), and mental effort (the ability to think clearly). Analysis: The final element recommended by the Federation is analysis against the performance objectives and costs, with information recycled in order to adjust future programs.

Incentives vs rewards

Then there is the question of whether incentives should differ from rewards: the former being used to encourage good performance and foster a positive working environment, while the latter are offered as a bonus to employees who have already achieved a certain standard. This distinction is important, because offering performance-based rewards after the fact brings an incentive program much more into the area of ROI and accounting rather than focusing on employee satisfaction.

This reward approach results in a structure designed to minimize risk and maximize cost control. An example of this would be raising the value of a reward as team budgets are met. 'Recognition' type incentives are then in danger of being superseded by sales incentives, which are linked to the business performance, which are seen as self-funding because they generate an ROI.

The problem with recognition-based incentives is that they tend to reward only the sales side of the company, where value to the business is more easily quantified. Singling out one segment of staff in this way goes against incentive theory, which stresses that all employees deserve the same level of satisfaction in their jobs. With ROI-based rewards, it becomes harder to get approval for programs aimed at non-sales teams, whose impact on the bottom line is less obvious.

A focus on rewarding one-off successes can also be a short-term strategy that ignores the importance of creating employees who are ambassadors for their company. One way to ensure all employees are recognized is to watch out for opportunities to reward loyalty and extra effort over the long term. Examples could be recognizing milestones in length of service or in personal events such as birthdays, weddings and the births of children, or singling out people who contribute constructive suggestions for changing the workplace environment.

Spending

Once you have decided whom the incentives should go to, how do you decide how much to spend? Ironically, spending too much may be counterproductive - experts agree that 1.5 to two percent of base pay, or the equivalent of two hours worth of salary costs per  month, should be enough to produce good results.

Cash is not always an employee's best friend, either. When questioned, staff will often admit to having spent their last cash bonus on bills, or may not even remember where the money went. This is why greater success can often be achieved with tangible incentives, such as gift certificates or vouchers redeemable at a range of stores or that offer the employee access to activities he or she might not normally undertake. This will make the incentive more memorable, rather than it just being lumped in with that month's salary.

You've revamped your incentive program, and now your staff are happier and the office in the atmosphere is positive and productive - but this may not be enough to satisfy your CEO if he or she was expecting to see tangible results. Employee satisfaction scores, retention rates and staff attrition scores can all be used to get around this problem, as well as looking at whether employees recommend their workplace to others, and seeking feedback regarding their feelings about their employer.

What about potential downsides of introducing an incentive program? There are some who argue that offering employee incentives takes away from the value of their own interest in their jobs. Over the years, an argument that has gained some traction is that incentives can destroy personal, intrinsic interest in work. However, research conducted in this area has concluded that rewarding people for exceeding targets causes them to value work more and even heightens self-confidence and employee loyalty.

Businesses also often express concern that money spent on incentives is wasted, because they are only paying for something that would have been achieved anyway. However, research conducted by Harold Stolovitch, Richard Clark and Steven Condly found that only eight percent of respondents said they would have achieved the same results without incentives.

There is some evidence that team member retention can be lower in companies in which incentives are used to reward performance, which may be due to the fact that the focus on individual abilities cause natural attrition in those whose performance is not up to par. However, organizations using incentive systems are able to hire and retain higher quality workers.

Targeting incentives

Tangible incentives (cash and awards) work to different degrees according to the conditions in which they are implemented. For example:

• To encourage something never done before: Tangible incentives yielded an average 15 percent increase in performance - the lowest of any type of performance goal.

• To focus on and persist in working toward a goal: Tangible incentives increase performance by 27 percent.

• To encourage "thinking smarter": Tangible incentives increased performance an average of 26 percent.

• To incentivize quality versus quantity goals: Tangible incentives had an equal effect on both quantity goals and quality goals.

• To Incentivize Teams vs. Individuals: Incentivized teams increased their performance by 45 percent; incentivized individuals increased performance an average of 27 percent. The increase in team performance is thought to result from decreased 'social loafing' that occurs in teams, because of the monitoring required by incentive programs. Clearly, peer pressure has significant value.

Source: The Incentive Research Foundation

Types of incentives

What are the most popular ways to reward employees?

Cash

Always popular, cash bonuses have the advantage of being simple - no wondering whether they will be to the recipient's taste. The downside is that when lumped in with that month's salary, a cash award may be quickly forgotten and not perceived as particularly special.

Food

Chocolates, cookies and other sweet treats are always popular, but it's worth thinking outside the box for something really memorable. Hampers can satisfy a variety of tastes, or go exotic and put together something with an international flavor. If your workforce includes dedicated carnivore, you can even have choice cuts of steak delivered to their doors.

Travel

Travel incentives are always popular because they allow employees the chance to escape the office environment, wind down and relax. Travel incentives can range from a short stay at a nearby hotel or resort to a more exotic long-haul destination. You could even scale it to progress from the local to the more far-flung on a scale depending on the level of achievement. 

Adventure

Probably the most memorable of rewards, 'adventure' gifts represent the more daring end of the incentives market. From the relatively tame options of motor racing and white water rafting, to sky diving, hot air ballooning - and even the opportunity to experience weightlessness at the edge of space.

Gift cards

Not as cold as than cash, more flexible than an actual gift - gift cards also top the incentives list, and can be used to offer just about any of the non-monetary incentives mentioned above.

How to build an incentive program

1.              Stay on top of trends

2.              Target incentives to different levels

3.              Create an employee survey

4.              Use survey results to build your program

5.              Encourage open communication