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Compensation & Benefits

Published March 2007

The Benefits of Incentives

 

  James Feldman and Diane L. Landsman

Incentives have been defined as "what companies put in place — above and beyond straight salary — to get people to do their jobs." The definition is only partly tongue-in-cheek. The most successful and progressive businesses in the world increasingly are embracing performance-based compensation and incentive programs. Why? Because most of the time, they meet a need and offer tangible benefits.

The need might be strategic: to attract and retain high-caliber talent, manage risk from rising competitive pressures or lift the levels of productivity and performance across the enterprise. Other objectives for implementing employee incentive programs are more tactical, such as shoring up sagging customer service, boosting sales or addressing a shift in the balance sheet. Often, they are short-term efforts focused on driving employee behavior toward achievement of a specific productivity or profit initiative, sales target or service goal.

Incentive programs are equally as effective in either an "up" or "down" business climate. When demand softens, the best competitors recognize the advantage of increasing their share of the market to weather the storm. During an "up" swing, incentives can help accelerate new product introductions, expand distribution and increase market penetration.

Cash or Noncash?
 
The incentives organizations offer employees might take the form of bonuses, or they can be noncash rewards. More than three-fourths of the Fortune 500 companies prefer to use noncash incentives. Expenditures for these programs exceed billions of dollars annually, as companies supplement their employee compensation plans (straight, salaried, or commissions and bonuses) with noncash incentive programs.

The Incentive Federation's "2005 Survey of Motivation and Incentive Applications" examined incentive users' objectives, practices, costs and results across all levels of American business. Results of the study revealed several trends in noncash incentive use:

•    83 percent use merchandise and/or incentive travel in their sales incentive programs.
•    72 percent use merchandise and/or incentive travel in their nonsales recognition/motivation programs.
•    Four out of five survey respondents (80 percent) think travel awards and merchandise awards are remembered longer by program participants than cash awards.

Characteristics of a Good Incentive Program

Whatever form of incentive a company selects, for the program to work well and achieve the desired results, the first order of business must be understanding the target employee group, what motivates that group and what it considers valuable. Otherwise, the program won't be personal or productive.

Identifying exactly what employees are likely to do without being paid to do it, or what their true interests are, is a complicated process. Many incentive managers make the mistake of assuming that what motivates them will motivate everyone.